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UWHARRIE CAPITAL CORP - Quarter Report: 2023 September (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 September 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: 7,028,454 shares of common stock outstanding as of November 3, 2023.

 

 


 

Table of Contents

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

2

 

 

 

 

 

 

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

 

2

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022

 

3

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 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, Use of Proceeds, and Issuer Purchases of Equity Securities

 

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.

 

 

September 30, 2023 (Unaudited)

 

 

December 31, 2022*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

9,463

 

 

$

5,357

 

Interest-earning deposits with banks

 

 

68,407

 

 

 

109,224

 

Cash and cash equivalents

 

 

77,870

 

 

 

114,581

 

Securities available for sale, at fair value (amortized cost $374,686 and $365,936, respectively)

 

 

328,099

 

 

 

324,683

 

Securities held to maturity, at amortized cost (fair value $24,807 and $27,178, respectively)

 

 

29,146

 

 

 

30,306

 

Less allowance for credit losses on securities held to maturity

 

 

(65

)

 

 

 

Net securities held to maturity

 

 

29,081

 

 

 

30,306

 

Equity security, at fair value

 

 

299

 

 

 

292

 

Loans held for sale

 

 

4,584

 

 

 

2,774

 

Loans held for investment

 

 

578,835

 

 

 

497,889

 

Less allowance for credit losses on loans

 

 

(5,115

)

 

 

(2,290

)

Net loans held for investment

 

 

573,720

 

 

 

495,599

 

Premises and equipment, net

 

 

15,172

 

 

 

14,735

 

Interest receivable

 

 

4,313

 

 

 

3,633

 

Restricted stock

 

 

1,672

 

 

 

1,428

 

Bank-owned life insurance

 

 

7,756

 

 

 

7,652

 

Deferred income tax benefit

 

 

12,512

 

 

 

10,726

 

Loan servicing assets

 

 

4,431

 

 

 

4,931

 

Mortgage banking derivatives

 

 

711

 

 

 

 

Other assets

 

 

9,582

 

 

 

8,150

 

Total assets

 

$

1,069,802

 

 

$

1,019,490

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand noninterest-bearing

 

$

276,484

 

 

$

261,882

 

Interest checking and money market accounts

 

 

435,289

 

 

 

486,548

 

Savings deposits

 

 

103,953

 

 

 

104,301

 

Time deposits, $250,000 and over

 

 

70,026

 

 

 

35,979

 

Other time deposits

 

 

104,537

 

 

 

51,146

 

Total deposits

 

 

990,289

 

 

 

939,856

 

Short-term borrowed funds

 

 

931

 

 

 

1,044

 

Long-term debt

 

 

29,085

 

 

 

29,607

 

Mortgage banking derivatives

 

 

 

 

 

175

 

Other liabilities

 

 

12,427

 

 

 

11,411

 

Total liabilities

 

 

1,032,732

 

 

 

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
7,049,510 and 7,075,125 at September 30, 2023 and December 31, 2022, respectively

 

 

8,812

 

 

 

8,844

 

Common stock dividend distributable

 

 

176

 

 

 

 

Additional paid-in capital

 

 

13,331

 

 

 

12,633

 

Undivided profits

 

 

39,980

 

 

 

37,030

 

Accumulated other comprehensive loss

 

 

(35,884

)

 

 

(31,765

)

Total Uwharrie Capital Corp shareholders’ equity

 

 

26,415

 

 

 

26,742

 

Noncontrolling interest

 

 

10,655

 

 

 

10,655

 

Total shareholders’ equity

 

 

37,070

 

 

 

37,397

 

Total liabilities and shareholders’ equity

 

$

1,069,802

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,645

 

 

$

5,367

 

 

$

21,001

 

 

$

15,771

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities, taxable

 

 

2,764

 

 

 

1,577

 

 

 

7,879

 

 

 

3,820

 

Investment securities, non-taxable

 

 

317

 

 

 

391

 

 

 

1,010

 

 

 

1,119

 

Equity Securities

 

 

5

 

 

 

5

 

 

 

15

 

 

 

15

 

Interest-earning deposits with banks and federal funds sold

 

 

979

 

 

 

725

 

 

 

3,230

 

 

 

1,012

 

Total interest income

 

 

11,710

 

 

 

8,065

 

 

 

33,135

 

 

 

21,737

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

1,564

 

 

 

434

 

 

 

4,471

 

 

 

693

 

Savings deposits

 

 

120

 

 

 

20

 

 

 

288

 

 

 

57

 

Time deposits, $250,000 and over

 

 

723

 

 

 

25

 

 

 

1,515

 

 

 

53

 

Other time deposits

 

 

781

 

 

 

34

 

 

 

1,742

 

 

 

100

 

Short-term borrowed funds

 

 

11

 

 

 

2

 

 

 

30

 

 

 

3

 

Long-term debt

 

 

334

 

 

 

338

 

 

 

1,000

 

 

 

1,011

 

Total interest expense

 

 

3,533

 

 

 

853

 

 

 

9,046

 

 

 

1,917

 

Net interest income

 

 

8,177

 

 

 

7,212

 

 

 

24,089

 

 

 

19,820

 

Provision for (recovery of) credit losses

 

 

599

 

 

 

(1,512

)

 

 

985

 

 

 

(1,407

)

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

 

 

7,578

 

 

 

8,724

 

 

 

23,104

 

 

 

21,227

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

272

 

 

 

282

 

 

 

785

 

 

 

786

 

Other service fees and commissions

 

 

875

 

 

 

763

 

 

 

2,586

 

 

 

2,465

 

Interchange and card transaction fees, net

 

 

291

 

 

 

315

 

 

 

910

 

 

 

856

 

Loss on sale of securities

 

 

 

 

 

 

 

 

(42

)

 

 

(91

)

Realized/unrealized gain (loss) on equity securities

 

 

(4

)

 

 

(6

)

 

 

7

 

 

 

(71

)

Income from mortgage banking

 

 

957

 

 

 

819

 

 

 

2,542

 

 

 

3,258

 

Supplemental executive retirement plan loss

 

 

(20

)

 

 

(74

)

 

 

(38

)

 

 

(626

)

Other income

 

 

148

 

 

 

139

 

 

 

437

 

 

 

542

 

Total noninterest income

 

 

2,519

 

 

 

2,238

 

 

 

7,187

 

 

 

7,119

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,822

 

 

 

4,868

 

 

 

14,498

 

 

 

14,796

 

Net occupancy expense

 

 

460

 

 

 

424

 

 

 

1,345

 

 

 

1,276

 

Equipment expense

 

 

195

 

 

 

199

 

 

 

578

 

 

 

580

 

Data processing costs

 

 

103

 

 

 

204

 

 

 

511

 

 

 

610

 

Loan costs

 

 

88

 

 

 

92

 

 

 

286

 

 

 

356

 

Professional fees and services

 

 

268

 

 

 

217

 

 

 

705

 

 

 

633

 

Marketing and donations

 

 

313

 

 

 

359

 

 

 

1,037

 

 

 

898

 

Electronic banking expense

 

 

140

 

 

 

123

 

 

 

410

 

 

 

351

 

Software amortization and maintenance

 

 

311

 

 

 

304

 

 

 

914

 

 

 

923

 

FDIC insurance

 

 

119

 

 

 

84

 

 

 

353

 

 

 

237

 

Supplemental executive retirement plan loss

 

 

(20

)

 

 

(74

)

 

 

(38

)

 

 

(626

)

Other noninterest expense

 

 

591

 

 

 

600

 

 

 

1,758

 

 

 

1,789

 

Total noninterest expense

 

 

7,390

 

 

 

7,400

 

 

 

22,357

 

 

 

21,823

 

Income before income taxes

 

 

2,707

 

 

 

3,562

 

 

 

7,934

 

 

 

6,523

 

Income taxes

 

 

558

 

 

 

737

 

 

 

1,608

 

 

 

1,215

 

Net income

 

$

2,149

 

 

$

2,825

 

 

$

6,326

 

 

$

5,308

 

Consolidated net income

 

$

2,149

 

 

$

2,825

 

 

$

6,326

 

 

$

5,308

 

Less: net income attributable to noncontrolling interest

 

 

(142

)

 

 

(142

)

 

 

(422

)

 

 

(422

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

 

2,007

 

 

 

2,683

 

 

 

5,904

 

 

 

4,886

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.28

 

 

$

0.37

 

 

$

0.82

 

 

$

0.67

 

Diluted

 

$

0.28

 

 

$

0.37

 

 

$

0.82

 

 

$

0.67

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,196,706

 

 

 

7,245,951

 

 

 

7,209,426

 

 

 

7,253,349

 

Diluted

 

 

7,196,706

 

 

 

7,245,951

 

 

 

7,209,426

 

 

 

7,253,349

 

See accompanying notes

3


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,149

 

 

$

2,825

 

 

$

6,326

 

 

$

5,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available for sale securities

 

 

(8,351

)

 

 

(12,158

)

 

 

(5,376

)

 

 

(42,836

)

Related tax effect

 

 

1,918

 

 

 

2,796

 

 

 

1,223

 

 

 

9,849

 

Reclassification of loss recognized in net income

 

 

 

 

 

 

 

 

42

 

 

 

91

 

Related tax effect

 

 

 

 

 

 

 

 

(8

)

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

(6,433

)

 

 

(9,362

)

 

 

(4,119

)

 

 

(32,913

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

(4,284

)

 

 

(6,537

)

 

 

2,207

 

 

 

(27,605

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

(142

)

 

 

(142

)

 

 

(422

)

 

 

(422

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital Corp

 

$

(4,426

)

 

$

(6,679

)

 

$

1,785

 

 

$

(28,027

)

See accompanying notes

4


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

Number of
Common
Shares
Issued

 

 

Common
Stock

 

 

Common
Stock
Dividend
Distributable

 

 

Additional
Paid-in
Capital

 

 

Undivided
Profits

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Non
Controlling
Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

Balance, June 30, 2022

 

 

6,930,717

 

 

$

8,664

 

 

$

 

 

$

11,814

 

 

$

32,754

 

 

$

(24,702

)

 

$

10,655

 

 

$

39,185

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,683

 

 

 

 

 

 

142

 

 

 

2,825

 

2.5% stock dividend declaration

 

 

 

 

 

 

 

 

216

 

 

 

1,083

 

 

 

(1,299

)

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(2,056

)

 

 

(3

)

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

(14

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,362

)

 

 

 

 

 

(9,362

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(105

)

 

 

(105

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, September 30, 2022

 

 

6,928,661

 

 

$

8,661

 

 

$

216

 

 

$

12,886

 

 

$

34,138

 

 

$

(34,064

)

 

$

10,655

 

 

$

32,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2023

 

 

7,057,847

 

 

$

8,823

 

 

$

 

 

$

12,521

 

 

$

39,012

 

 

$

(29,451

)

 

$

10,655

 

 

$

41,560

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,007

 

 

 

 

 

 

142

 

 

 

2,149

 

2% stock dividend declaration

 

 

 

 

 

 

 

 

176

 

 

 

863

 

 

 

(1,039

)

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(8,337

)

 

 

(11

)

 

 

 

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

 

(64

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,433

)

 

 

 

 

 

(6,433

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(105

)

 

 

(105

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, September 30, 2023

 

 

7,049,510

 

 

$

8,812

 

 

$

176

 

 

$

13,331

 

 

$

39,980

 

 

$

(35,884

)

 

$

10,655

 

 

$

37,070

 

 

 

 

Number of
Common
Shares
Issued

 

 

Common
Stock

 

 

Common
Stock
Dividend
Distributable

 

 

Additional
Paid-in
Capital

 

 

Undivided
Profits

 

 

Accumulated
Other
Comprehensive
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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,886

 

 

 

 

 

 

422

 

 

 

5,308

 

2.5% stock dividend declaration

 

 

 

 

 

 

 

 

216

 

 

 

1,083

 

 

 

(1,299

)

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(30,895

)

 

 

(39

)

 

 

 

 

 

(229

)

 

 

 

 

 

 

 

 

 

 

 

(268

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,913

)

 

 

 

 

 

(32,913

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(311

)

 

 

(311

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Balance, September 30, 2022

 

 

6,928,661

 

 

$

8,661

 

 

$

216

 

 

$

12,886

 

 

$

34,138

 

 

$

(34,064

)

 

$

10,655

 

 

$

32,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,904

 

 

 

 

 

 

422

 

 

 

6,326

 

2% stock dividend declaration

 

 

 

 

 

 

 

 

176

 

 

 

863

 

 

 

(1,039

)

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(25,615

)

 

 

(32

)

 

 

 

 

 

(165

)

 

 

 

 

 

 

 

 

 

 

 

(197

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,119

)

 

 

 

 

 

(4,119

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(311

)

 

 

(311

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Balance, September 30, 2023

 

 

7,049,510

 

 

$

8,812

 

 

$

176

 

 

$

13,331

 

 

$

39,980

 

 

$

(35,884

)

 

$

10,655

 

 

$

37,070

 

See accompanying notes

5


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

6,326

 

 

$

5,308

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

828

 

 

 

860

 

Right of use asset amortization

 

 

282

 

 

 

263

 

Provision for (recovery of) credit losses

 

 

985

 

 

 

(1,407

)

Loss on sale of securities available for sale

 

 

42

 

 

 

91

 

Gain on sale of premises and equipment

 

 

(70

)

 

 

(152

)

Gain on sale of mortgage loans

 

 

(690

)

 

 

(2,341

)

Realized/unrealized (gain) loss on equity securities

 

 

(7

)

 

 

71

 

Net amortization of premium on investment securities available for sale

 

 

1,430

 

 

 

2,074

 

Net amortization of premium on investment securities held to maturity

 

 

107

 

 

 

111

 

Amortization of loan servicing rights

 

 

933

 

 

 

1,019

 

Originations and purchases of mortgage loans for sale

 

 

(60,803

)

 

 

(102,337

)

Proceeds from sales of mortgage loans for sale

 

 

59,683

 

 

 

121,622

 

Mortgage banking derivatives

 

 

(886

)

 

 

640

 

Loan servicing assets

 

 

(432

)

 

 

(1,090

)

Accrued interest receivable

 

 

(680

)

 

 

(649

)

Prepaid assets

 

 

(523

)

 

 

(56

)

Cash surrender value of life insurance

 

 

(104

)

 

 

(89

)

Miscellaneous other assets

 

 

(469

)

 

 

1,181

 

Accrued interest payable

 

 

219

 

 

 

63

 

Miscellaneous other liabilities

 

 

788

 

 

 

46

 

Net cash provided by operating activities

 

 

6,959

 

 

 

25,228

 

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

 

 

19,833

 

 

 

32,304

 

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

 

 

1,053

 

 

 

347

 

Purchase of investment securities available for sale

 

 

(41,384

)

 

 

(76,657

)

Purchase of investments in other assets

 

 

(300

)

 

 

(409

)

Net change in restricted stock

 

 

(244

)

 

 

(507

)

Net increase in loans

 

 

(81,659

)

 

 

(56,354

)

Purchase of premises and equipment

 

 

(1,497

)

 

 

(228

)

Proceeds from sale of premises and equipment

 

 

78

 

 

 

545

 

Net cash used by investing activities

 

 

(92,791

)

 

 

(92,561

)

Cash flows from financing activities

 

 

 

 

 

 

Net increase in deposit accounts

 

 

50,433

 

 

 

126,809

 

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

 

 

(113

)

 

 

22

 

Repayment of long-term borrowings

 

 

(580

)

 

 

 

Repurchase of common stock, net

 

 

(197

)

 

 

(268

)

Dividends paid on preferred stock (noncontrolling interest)

 

 

(422

)

 

 

(422

)

Net cash provided by financing activities

 

 

49,121

 

 

 

126,141

 

Increase (decrease) in cash and cash equivalents

 

 

(36,711

)

 

 

58,808

 

Cash and cash equivalents, beginning of period

 

 

114,581

 

 

 

94,410

 

Cash and cash equivalents, end of period

 

$

77,870

 

 

$

153,218

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Interest paid

 

$

8,764

 

 

$

1,792

 

Income taxes paid

 

 

1,762

 

 

 

1,217

 

Supplemental schedule of non-cash activities

 

 

 

 

 

 

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

 

$

(4,119

)

 

$

(32,913

)

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 September 30, 2023, there was no allowance for credit loss related to

8


 

the available for sale portfolio. Accrued interest receivable on available for sale debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $2.2 million at September 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 $392,000 at September 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 September 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 September 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 loss for the three and nine months ended September 30, 2023 and 2022:

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(29,451

)

 

$

(24,702

)

 

$

(31,765

)

 

$

(1,151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications,
   net of $
1,918, $2,796, $1,223 and $9,849 tax effect, respectively

 

 

(6,433

)

 

 

(9,362

)

 

 

(4,153

)

 

 

(32,987

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive loss,
   net of $
0, $0, ($8) and ($17) tax effect, respectively

 

 

 

 

 

 

 

 

34

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive loss

 

 

(6,433

)

 

 

(9,362

)

 

 

(4,119

)

 

 

(32,913

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

(35,884

)

 

$

(34,064

)

 

$

(35,884

)

 

$

(34,064

)

 

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

On October 17, 2023, the Company's Board of Directors declared a 2% stock dividend payable November 21, 2023 to shareholders of record on November 7, 2023. All information in the accompanying consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend. The number of shares and earnings per share for the 2022 periods have also been adjusted for the 2.5% stock dividend declared on October 18, 2022.

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 September 30, 2023 or December 31, 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 7,196,706 for the three-month period ended September 30, 2023 compared to 7,245,951 for the three-month period ended September 30, 2022. For the nine-month period ended September 30, 2023, the weighted average number of common shares outstanding was 7,209,426 compared to 7,253,349 for the nine-month period ended September 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:

September 30, 2023

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

54,974

 

 

$

 

 

$

4,740

 

 

$

50,234

 

U.S. government agencies

 

 

46,813

 

 

 

92

 

 

 

1,162

 

 

 

45,743

 

GSE - Mortgage-backed securities and CMOs

 

 

138,465

 

 

 

 

 

 

18,505

 

 

 

119,960

 

Asset-backed securities

 

 

32,656

 

 

 

309

 

 

 

273

 

 

 

32,692

 

State and political subdivisions

 

 

95,778

 

 

 

 

 

 

21,752

 

 

 

74,026

 

Corporate bonds

 

 

6,000

 

 

 

 

 

 

556

 

 

 

5,444

 

Total securities available for sale

 

$

374,686

 

 

$

401

 

 

$

46,988

 

 

$

328,099

 

September 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

 

$

133

 

 

$

 

 

$

1

 

 

$

132

 

 

$

 

State and political subdivisions

 

 

14,013

 

 

 

 

 

 

2,222

 

 

 

11,791

 

 

 

 

Corporate bonds

 

 

15,000

 

 

 

 

 

 

2,116

 

 

 

12,884

 

 

 

65

 

Total securities held to maturity

 

$

29,146

 

 

$

 

 

$

4,339

 

 

$

24,807

 

 

$

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 September 30, 2023 and December 31, 2022. The Company owned Federal Home Loan Bank (FHLB) stock reported at cost of $712,000 and $469,000 at September 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 September 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 nine months ended September 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

 

Recovery of credit losses

 

 

 

 

 

(3

)

 

 

(2

)

Charge-offs of securities

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

Balance, September 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 September 30, 2023.

 

September 30, 2023

 

U.S. government agencies

 

 

State and political subdivisions

 

 

Corporate bonds

 

 

Total

 

 

 

(dollars in thousands)

 

Aaa

 

$

 

 

$

1,161

 

 

$

 

 

$

1,161

 

Aa1/Aa2/Aa3

 

 

 

 

 

12,852

 

 

 

 

 

 

12,852

 

A1/A2

 

 

 

 

 

 

 

 

 

 

 

 

BBB

 

 

 

 

 

 

 

 

 

 

 

 

Not rated

 

 

133

 

 

 

 

 

 

15,000

 

 

 

15,133

 

Total

 

$

133

 

 

$

14,013

 

 

$

15,000

 

 

$

29,146

 

At September 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 nine months ended September 30, 2023.

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

 

 

$

11,329

 

 

$

8,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

 

 

$

 

 

$

54

 

 

$

52

 

Realized losses from sales

 

 

 

 

 

 

 

 

(96

)

 

 

(143

)

Net realized losses

 

$

 

 

$

 

 

$

(42

)

 

$

(91

)

 

At September 30, 2023 and December 31, 2022, securities available for sale with a carrying amount of $151.0 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. 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 September 30, 2023.

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2023

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

 

 

$

 

 

$

 

 

 

9

 

 

$

50,234

 

 

$

4,740

 

 

$

50,234

 

 

$

4,740

 

U.S. government agencies

 

 

11

 

 

 

17,131

 

 

 

101

 

 

 

18

 

 

 

15,571

 

 

 

1,061

 

 

 

32,702

 

 

 

1,162

 

GSE-Mortgage-backed securities and CMOs

 

 

8

 

 

 

16,565

 

 

 

537

 

 

 

60

 

 

 

101,515

 

 

 

17,968

 

 

 

118,080

 

 

 

18,505

 

Asset-backed securities

 

 

1

 

 

 

666

 

 

 

2

 

 

 

9

 

 

 

13,511

 

 

 

271

 

 

 

14,177

 

 

 

273

 

State and political subdivisions

 

 

7

 

 

 

9,500

 

 

 

777

 

 

 

56

 

 

 

64,210

 

 

 

20,975

 

 

 

73,710

 

 

 

21,752

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

5,444

 

 

 

556

 

 

 

5,444

 

 

 

556

 

Total securities available for sale

 

 

27

 

 

$

43,862

 

 

$

1,417

 

 

 

155

 

 

$

250,485

 

 

$

45,571

 

 

$

294,347

 

 

$

46,988

 

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

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
 Losses

 

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

4

 

 

$

27,991

 

 

$

509

 

 

 

5

 

 

$

22,639

 

 

$

3,809

 

 

$

50,630

 

 

$

4,318

 

U.S. government agencies

 

 

6

 

 

 

8,580

 

 

 

69

 

 

 

14

 

 

 

13,994

 

 

 

979

 

 

 

22,574

 

 

 

1,048

 

GSE-Mortgage-backed securities and CMOs

 

 

28

 

 

 

35,657

 

 

 

2,021

 

 

 

34

 

 

 

77,799

 

 

 

14,043

 

 

 

113,456

 

 

 

16,064

 

Asset-backed securities

 

 

12

 

 

 

22,828

 

 

 

315

 

 

 

5

 

 

 

7,326

 

 

 

297

 

 

 

30,154

 

 

 

612

 

State and political subdivisions

 

 

14

 

 

 

19,381

 

 

 

688

 

 

 

50

 

 

 

61,359

 

 

 

18,001

 

 

 

80,740

 

 

 

18,689

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

5,344

 

 

 

656

 

 

 

5,344

 

 

 

656

 

Total securities available for sale

 

 

64

 

 

$

114,437

 

 

$

3,602

 

 

 

111

 

 

$

188,461

 

 

$

37,785

 

 

$

302,898

 

 

$

41,387

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2022

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Number of Securities

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

1

 

 

$

147

 

 

$

5

 

 

 

 

 

$

 

 

$

 

 

$

147

 

 

$

5

 

State and political subdivisions

 

 

9

 

 

 

12,354

 

 

 

1,621

 

 

 

1

 

 

 

1,025

 

 

 

154

 

 

 

13,379

 

 

 

1,775

 

Corporate bonds

 

 

4

 

 

 

6,383

 

 

 

367

 

 

 

10

 

 

 

7,269

 

 

 

981

 

 

 

13,652

 

 

 

1,348

 

Total securities held to maturity

 

 

14

 

 

$

18,884

 

 

$

1,993

 

 

 

11

 

 

$

8,294

 

 

$

1,135

 

 

$

27,178

 

 

$

3,128

 

 

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 September 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.

13


 

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

 

 

September 30, 2023

 

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

 

Book
Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

25,974

 

 

 

25,677

 

 

 

4.72

%

Due after one but within five years

 

 

34,202

 

 

 

30,921

 

 

 

2.16

%

Due after five but within ten years

 

 

79,717

 

 

 

68,298

 

 

 

2.36

%

Due after ten years

 

 

234,793

 

 

 

203,203

 

 

 

3.54

%

 

 

$

374,686

 

 

$

328,099

 

 

 

3.24

%

 

 

 

September 30, 2023

 

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

 

Book
Yield

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,025

 

 

 

1,016

 

 

 

2.83

%

Due after one but within five years

 

 

 

 

 

 

 

 

 

Due after five but within ten years

 

 

18,852

 

 

 

16,206

 

 

 

4.17

%

Due after ten years

 

 

9,269

 

 

 

7,585

 

 

 

3.50

%

 

 

$

29,146

 

 

$

24,807

 

 

 

3.91

%

 

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(4

)

 

$

(6

)

 

$

7

 

 

$

(71

)

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

 

$

(4

)

 

$

(6

)

 

$

7

 

 

$

(71

)

 

14


 

Note 6 – Loans Held for Investment

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

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

Commercial

 

$

97,864

 

 

$

85,917

 

SBA Paycheck Protection Program (PPP)

 

 

215

 

 

 

545

 

Real estate - commercial

 

 

211,933

 

 

 

183,550

 

Other real estate construction loans

 

 

44,091

 

 

 

37,077

 

Other loans

 

 

6,326

 

 

 

6,666

 

Noncommercial

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

12,171

 

 

 

6,613

 

Real estate - residential

 

 

133,957

 

 

 

108,669

 

Home equity

 

 

59,954

 

 

 

58,186

 

Consumer loans

 

 

11,488

 

 

 

9,762

 

 

 

 

577,999

 

 

 

496,985

 

Less:

 

 

 

 

 

 

Allowance for credit losses

 

 

(5,115

)

 

 

(2,290

)

Deferred loan costs net

 

 

836

 

 

 

904

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

573,720

 

 

$

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 nine months ended September 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, June 30, 2023

 

$

1,028

 

 

$

1,880

 

 

$

356

 

 

$

7

 

 

$

23

 

 

$

666

 

 

$

581

 

 

$

172

 

 

$

4,713

 

Provision for (recovery of) credit losses

 

 

361

 

 

 

84

 

 

 

62

 

 

 

3

 

 

 

3

 

 

 

59

 

 

 

(13

)

 

 

39

 

 

 

598

 

Charge-offs

 

 

(201

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(214

)

Recoveries

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

14

 

 

 

18

 

Net (charge-offs) recoveries

 

 

(198

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

(196

)

Balance, September 30, 2023

 

$

1,191

 

 

$

1,964

 

 

$

418

 

 

$

10

 

 

$

26

 

 

$

726

 

 

$

568

 

 

$

212

 

 

$

5,115

 

 

 

 

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

 

 

585

 

 

 

187

 

 

 

140

 

 

 

1

 

 

 

26

 

 

 

89

 

 

 

(92

)

 

 

54

 

 

 

990

 

Charge-offs

 

 

(545

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71

)

 

 

(658

)

Recoveries

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

8

 

 

 

62

 

 

 

86

 

Net (charge-offs) recoveries

 

 

(531

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

2

 

 

 

8

 

 

 

(9

)

 

 

(572

)

Balance, September 30, 2023

 

$

1,191

 

 

$

1,964

 

 

$

418

 

 

$

10

 

 

$

26

 

 

$

726

 

 

$

568

 

 

$

212

 

 

$

5,115

 

 

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 September 30, 2022

 

Commercial

 

 

Non-Commercial

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,560

 

 

$

1,634

 

 

$

4,194

 

Recovery of loan losses

 

 

(1,208

)

 

 

(304

)

 

 

(1,512

)

Charge-offs

 

 

 

 

 

(28

)

 

 

(28

)

Recoveries

 

 

3

 

 

 

4

 

 

 

7

 

Net (charge-offs) recoveries

 

 

3

 

 

 

(24

)

 

 

(21

)

Balance at end of period

 

$

1,355

 

 

$

1,306

 

 

$

2,661

 

 

Allowance for loan losses for the nine months ended September 30, 2022

 

Commercial

 

 

Non-Commercial

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,429

 

 

$

1,597

 

 

$

4,026

 

Recovery of loan losses

 

 

(1,142

)

 

 

(265

)

 

 

(1,407

)

Charge-offs

 

 

 

 

 

(52

)

 

 

(52

)

Recoveries

 

 

68

 

 

 

26

 

 

 

94

 

Net (charge-offs) recoveries

 

 

68

 

 

 

(26

)

 

 

42

 

Balance at end of period

 

$

1,355

 

 

$

1,306

 

 

$

2,661

 

 

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

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

39

 

 

$

528

 

 

$

1,316

 

 

$

298,363

 

 

$

1,355

 

 

$

298,891

 

Non-Commercial

 

 

150

 

 

 

2,369

 

 

 

1,156

 

 

 

175,915

 

 

 

1,306

 

 

 

178,284

 

Total

 

$

189

 

 

$

2,897

 

 

$

2,472

 

 

$

474,278

 

 

$

2,661

 

 

$

477,175

 

 

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:

September 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

 

$

59

 

 

$

 

 

$

59

 

 

$

97,805

 

 

$

97,864

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

211

 

 

 

211

 

 

 

 

Real estate - commercial

 

 

46

 

 

 

532

 

 

 

578

 

 

 

211,486

 

 

 

212,064

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

44,091

 

 

 

44,091

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

12,171

 

 

 

12,171

 

 

 

 

Real estate - residential

 

 

240

 

 

 

289

 

 

 

529

 

 

 

134,137

 

 

 

134,666

 

 

 

 

Home equity

 

 

350

 

 

 

 

 

 

350

 

 

 

59,604

 

 

 

59,954

 

 

 

 

Consumer loans

 

 

31

 

 

 

 

 

 

31

 

 

 

11,457

 

 

 

11,488

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

6,326

 

 

 

6,326

 

 

 

 

Total

 

$

726

 

 

$

821

 

 

$

1,547

 

 

$

577,288

 

 

$

578,835

 

 

$

 

 

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 September 30, 2023 and December 31, 2022.

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

 

 

CECL

 

 

Nine Months Ended

 

 

Incurred Loss

 

 

 

September 30, 2023

 

 

September 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

 

$

 

 

$

 

 

$

 

 

$

 

 

$

71

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

400

 

 

 

132

 

 

 

532

 

 

 

13

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

187

 

 

 

102

 

 

 

289

 

 

 

13

 

 

 

117

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

587

 

 

$

234

 

 

$

821

 

 

$

26

 

 

$

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 September 30, 2023.

 

 

 

 

 

 

 

 

September 30, 2023

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

 

(dollars in thousands)

 

Commercial

 

$

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

Real estate - commercial

 

 

523

 

 

 

19

 

Other real estate construction

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

Real estate - residential

 

 

178

 

 

 

 

Home equity

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total

 

$

701

 

 

$

19

 

 

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 September 30, 2023:

 

September 30, 2023

 

Term Loans by Year of Origination

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

 

 

(dollars in thousands)

 

Commercial (including PPP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

16,816

 

 

$

22,316

 

 

$

16,937

 

 

$

8,187

 

 

$

2,349

 

 

$

10,985

 

 

$

19,689

 

 

$

97,279

 

Watch

 

 

52

 

 

 

25

 

 

 

 

 

 

154

 

 

 

 

 

 

 

 

 

498

 

 

 

729

 

Special Mention

 

 

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

67

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial (including PPP)

 

 

16,868

 

 

 

22,390

 

 

 

16,937

 

 

 

8,341

 

 

 

2,349

 

 

 

11,003

 

 

 

20,187

 

 

 

98,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

44,823

 

 

 

45,990

 

 

 

38,640

 

 

 

25,923

 

 

 

15,741

 

 

 

36,805

 

 

 

2,486

 

 

 

210,408

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

76

 

Special Mention

 

 

 

 

 

 

 

 

588

 

 

 

123

 

 

 

175

 

 

 

162

 

 

 

 

 

 

1,048

 

Substandard

 

 

 

 

 

 

 

 

400

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

532

 

Total real estate - commercial

 

 

44,823

 

 

 

45,990

 

 

 

39,628

 

 

 

26,178

 

 

 

15,992

 

 

 

36,967

 

 

 

2,486

 

 

 

212,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

18,834

 

 

 

12,530

 

 

 

4,146

 

 

 

4,934

 

 

 

579

 

 

 

2,223

 

 

 

797

 

 

 

44,043

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

48

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other real estate construction

 

 

18,834

 

 

 

12,530

 

 

 

4,146

 

 

 

4,934

 

 

 

579

 

 

 

2,271

 

 

 

797

 

 

 

44,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

6,208

 

 

 

5,463

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,171

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate 1-4 family construction

 

 

6,208

 

 

 

5,463

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

32,890

 

 

 

41,744

 

 

 

25,400

 

 

 

11,693

 

 

 

3,566

 

 

 

15,867

 

 

 

583

 

 

 

131,743

 

Watch

 

 

 

 

 

 

 

 

209

 

 

 

82

 

 

 

125

 

 

 

721

 

 

 

 

 

 

1,137

 

Special Mention

 

 

109

 

 

 

558

 

 

 

504

 

 

 

 

 

 

 

 

 

326

 

 

 

 

 

 

1,497

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

204

 

 

 

 

 

 

85

 

 

 

 

 

 

289

 

Total real estate - residential

 

 

32,999

 

 

 

42,302

 

 

 

26,113

 

 

 

11,979

 

 

 

3,691

 

 

 

16,999

 

 

 

583

 

 

 

134,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

76

 

 

 

134

 

 

 

156

 

 

 

237

 

 

 

94

 

 

 

1,655

 

 

 

57,452

 

 

 

59,804

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

131

 

 

 

 

 

 

150

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total home equity

 

 

76

 

 

 

134

 

 

 

156

 

 

 

237

 

 

 

113

 

 

 

1,786

 

 

 

57,452

 

 

 

59,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

3,881

 

 

 

2,359

 

 

 

739

 

 

 

140

 

 

 

168

 

 

 

382

 

 

 

3,775

 

 

 

11,444

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total consumer loans

 

 

3,881

 

 

 

2,403

 

 

 

739

 

 

 

140

 

 

 

168

 

 

 

382

 

 

 

3,775

 

 

 

11,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

 

 

 

1,615

 

 

 

2,934

 

 

 

1,329

 

 

 

 

 

 

448

 

 

 

 

 

 

6,326

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other loans

 

 

 

 

 

1,615

 

 

 

2,934

 

 

 

1,329

 

 

 

 

 

 

448

 

 

 

 

 

 

6,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

123,689

 

 

$

132,827

 

 

$

91,153

 

 

$

53,138

 

 

$

22,892

 

 

$

69,856

 

 

$

85,280

 

 

$

578,835

 

During nine months ended September 30, 2023, twenty-five loans totaling $987,000 were converted from revolving to term loans.

19


 

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

 

September 30, 2023

 

Gross Loan Charge-offs by Year of Origination

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

 

 

$

 

 

$

159

 

 

$

315

 

 

$

71

 

 

$

 

 

$

545

 

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

 

 

 

37

 

 

 

71

 

Total charge-offs

 

$

 

 

$

65

 

 

$

4

 

 

$

162

 

 

$

315

 

 

$

75

 

 

$

37

 

 

$

658

 

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 September 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 September 30, 2023 and December 31, 2022:

September 30, 2023

 

Performing

 

 

Non-
Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

97,864

 

 

$

 

 

$

97,864

 

SBA Paycheck Protection Program (PPP)

 

 

211

 

 

 

 

 

 

211

 

Real estate - commercial

 

 

211,532

 

 

 

532

 

 

 

212,064

 

Other real estate construction

 

 

44,091

 

 

 

 

 

 

44,091

 

Real estate 1-4 family construction

 

 

12,171

 

 

 

 

 

 

12,171

 

Real estate - residential

 

 

134,377

 

 

 

289

 

 

 

134,666

 

Home equity

 

 

59,954

 

 

 

 

 

 

59,954

 

Consumer loans

 

 

11,488

 

 

 

 

 

 

11,488

 

Other loans

 

 

6,326

 

 

 

 

 

 

6,326

 

Total

 

$

578,014

 

 

$

821

 

 

$

578,835

 

 

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 nine months ended September 30, 2022.

 

 

 

Nine Months Ended September 30, 2022

 

 

 

Average
Recorded
Investment

 

 

Interest
Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Commercial

 

$

497

 

 

$

30

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

Real estate - commercial

 

 

1,024

 

 

 

54

 

Other real estate construction

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

Real estate - residential

 

 

2,192

 

 

 

118

 

Home equity

 

 

38

 

 

 

1

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total

 

$

3,751

 

 

$

203

 

 

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 nine-month period ended September 30, 2023. Accordingly, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first three quarters 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.

The following table presents as of September 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

 

September 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 September 30, 2023, operating lease ROU assets were $1.6 million and the operating lease liability was $1.7 million, compared to operating lease ROU assets of $2.0 million and an operating lease liability of $2.1 million at September 30, 2022. Lease costs associated with all leases was $106,000 and $317,000 for the three and nine months ended September 30, 2023, respectively.

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

 

 

Nine Months Ended September 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

 

$

325

 

 

$

307

 

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

 

 

1,590

 

 

 

1,965

 

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

 

 

4.2

 

 

 

5.1

 

Weighted-average discount rate - operating leases

 

 

2.57

%

 

 

2.53

%

 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

September 30, 2023

 

 

 

 

(in thousands)

2023 (remaining three months)

 

$

109

 

 

2024

 

 

446

 

 

2025

 

 

455

 

 

2026

 

 

416

 

 

2027

 

 

260

 

 

2028 and thereafter

 

 

117

 

 

Total lease payments

 

 

1,803

 

 

Less: Interest

 

 

(99

)

 

Present value of lease liabilities

 

 

1,704

 

 

 

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 September 30, 2023 and December 31, 2022, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

193,001

 

 

$

165,992

 

Credit card commitments

 

 

22,711

 

 

 

20,376

 

Standby letters of credit

 

 

7,988

 

 

 

8,135

 

Total commitments

 

$

223,700

 

 

$

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 cancelable. 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 September 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 nine months ended September 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, September 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 September 30, 2023 and December 31, 2022:

 

 

September 30, 2023

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

50,234

 

 

$

50,234

 

 

$

 

 

$

 

U.S. government agencies

 

 

45,743

 

 

 

 

 

 

45,743

 

 

 

 

GSE - Mortgage-backed securities and CMOs

 

 

119,960

 

 

 

 

 

 

115,956

 

 

 

4,004

 

Asset-backed securities

 

 

32,692

 

 

 

 

 

 

32,692

 

 

 

 

State and political subdivisions

 

 

74,026

 

 

 

 

 

 

74,026

 

 

 

 

Corporate bonds

 

 

5,444

 

 

 

 

 

 

5,444

 

 

 

 

Equity securities

 

 

299

 

 

 

299

 

 

 

 

 

 

 

Mortgage banking derivatives

 

 

711

 

 

 

 

 

 

283

 

 

 

428

 

Total assets at fair value on a recurring basis

 

$

329,109

 

 

$

50,533

 

 

$

274,144

 

 

$

4,432

 

 

 

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:

 

 

September 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

 

523

 

 

 

 

 

 

523

 

Included in accumulated other comprehensive income (loss)

 

 

 

 

5

 

 

 

5

 

Change in observability of significant inputs:

 

 

 

 

 

 

 

 

Included in income from mortgage banking

 

 

 

 

 

 

 

 

Included in accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

Balance at September 30, 2023

$

428

 

 

$

4,004

 

 

$

4,432

 

 

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 September 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 September 30, 2023 was calculated based on a notional amount of $23.7 million. Significant unobservable inputs are used to determine the fair value of these derivatives. At September 30, 2023, such inputs included anticipated margins to be earned based on market movement from the original lock date and an overall projected pull-through rate of 87.7% 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 nine months ended

26


 

September 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 September 30, 2023 and December 31, 2022:

 

 

 

September 30, 2023

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans

 

$

112

 

 

$

 

 

$

 

 

$

112

 

Total assets at fair value on a nonrecurring basis

 

$

112

 

 

$

 

 

$

 

 

$

112

 

 

 

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

September 30, 2023

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General
Range

Nonrecurring measurements:

 

 

 

 

 

 

Individually evaluated loans

 

Discounted appraisals

 

Collateral discounts and estimated costs to sell

 

0 - 25%

 

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 September 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 September 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 September 30, 2023 and December 31, 2022:

September 30, 2023

 

Carrying
Value

 

 

Estimated
Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

77,870

 

 

$

77,870

 

 

$

77,870

 

 

$

 

 

$

 

Securities available for sale

 

 

328,099

 

 

 

328,099

 

 

 

50,234

 

 

 

273,861

 

 

 

4,004

 

Securities held to maturity

 

 

29,146

 

 

 

24,807

 

 

 

 

 

 

11,923

 

 

 

12,884

 

Equity securities

 

 

299

 

 

 

299

 

 

 

299

 

 

 

 

 

 

 

Loans held for investment, net

 

 

573,720

 

 

 

523,118

 

 

 

 

 

 

 

 

 

523,118

 

Loans held for sale

 

 

4,584

 

 

 

4,584

 

 

 

 

 

 

4,584

 

 

 

 

Restricted stock

 

 

1,672

 

 

 

1,672

 

 

 

1,672

 

 

 

 

 

 

 

Loan servicing assets

 

 

4,431

 

 

 

7,161

 

 

 

 

 

 

7,161

 

 

 

 

Mortgage banking derivatives

 

 

711

 

 

 

711

 

 

 

 

 

 

283

 

 

 

428

 

Accrued interest receivable

 

 

4,313

 

 

 

4,313

 

 

 

 

 

 

 

 

 

4,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

990,289

 

 

 

988,578

 

 

 

 

 

 

988,578

 

 

 

 

Short-term borrowings

 

 

931

 

 

 

931

 

 

 

 

 

 

931

 

 

 

 

Long-term borrowings

 

 

29,085

 

 

 

24,118

 

 

 

 

 

 

 

 

 

24,118

 

Accrued interest payable

 

 

328

 

 

 

328

 

 

 

 

 

 

 

 

 

328

 

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 September 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 no longer holds or issues loan contracts that reference LIBOR. As of July 1, 2023, all loan contracts that previously referenced LIBOR had been modified. The Company does not anticipate a material financial impact as a result of these modifications.

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 September 30, 2023 and December 31, 2022.

 

 

Notional Amount

 

 

Fair Value

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Balance at September 30, 2023

 

 

 

 

 

Included in mortgage banking derivatives asset:

 

 

 

 

 

Interest rate lock commitments

$

23,662

 

 

$

428

 

Forward sales commitments

 

2,433

 

 

 

64

 

To-be-announced mortgage-backed securities trades

 

24,500

 

 

 

219

 

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 September 30, 2023 and December 31, 2022.

During the nine months ended September 30, 2023, the Company’s total assets increased $50.3 million, from $1.02 billion to $1.07 billion.

Cash and cash equivalents decreased $36.7 million during the nine months ended September 30, 2023, from $114.6 million to $77.9 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 nine-month period ended September 30, 2023, investment securities increased $2.3 million to $357.2 million at September 30, 2023. At September 30, 2023, the Company had unrealized losses on securities available for sale of $46.6 million, compared to unrealized losses of $41.3 million at December 31, 2022, a deterioration of $5.3 million. The decline in fair value of the available for sale securities is related to the increase in market interest rates at September 30, 2023 compared to December 31, 2022.

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 nine months 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, with an amortized cost basis of $29.1 million, at September 30, 2023.

At September 30, 2023, equity securities improved in value from $292,000 at December 31, 2022 to $299,000 as a result of the increase in value in the equity market.

Loans held for sale increased $1.8 million from December 31, 2022 to $4.6 million at September 30, 2023. Loans held for investment increased from $497.9 million at December 31, 2022 to $578.8 million at September 30, 2023, an increase of $80.9 million. The Company experienced a net increase in all loan sectors with the exception of loans categorized as "Commercial - Other."

The allowance for loan losses was $2.3 million at December 31, 2022, which represented 0.46% of the total loans held for investment. As noted above, 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 nine months ended September 30, 2023, the model called for a $990,000 increase to our current expected credit losses to account for loan growth and charge-offs during the same period. The allowance as a percentage of loans held for investment was 0.88% at September 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 deferred tax assets, which increased $1.8 million from $10.7 million as of December 31, 2022 to $12.5 million at September 30, 2023 as a result of the decline in fair value of the available for sale security portfolio. Additionally, prepaid expenses, included in other assets, increased $522,000 from $830,000 as of December 31, 2022 to $1.4 million at September 30, 2023.

31


 

Customer deposits, our primary funding source, experienced a $50.4 million increase during the nine-month period ended September 30, 2023, increasing from $939.9 million to $990.3 million, a 5.4% increase. Growth in the number of deposit accounts and relationship sizes, combined with promotional time deposit offerings, contributed to the increase in total deposits. Demand noninterest-bearing checking accounts increased $14.6 million, primarily from growth in commercial accounts, and time deposits increased $87.4 million during the nine-month period ended September 30, 2023. Interest checking and money market accounts decreased $51.3 million and savings deposits decreased $348,000 during the nine months ended September 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 higher yielding 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 $113,000 for the nine-month period ended September 30, 2023. At September 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 September 30, 2023.

Other changes in the Company’s liabilities are related to an increase of $1.0 million in other liabilities from December 31, 2022 to September 30, 2023 resulting primarily from accrual of reserves for payables due throughout 2023. Additionally, accrued interest payable increased during the same nine-month period as higher interest rates were paid on deposit accounts.

At September 30, 2023, total shareholders’ equity was $37.1 million, a decrease of $327,000 from December 31, 2022. This decrease is largely a result of unrealized losses on available for sale investment securities, net of tax, increasing by $4.1 million from December 31, 2022 to September 30, 2023. Net income for the nine-month period ended September 30, 2023 was $6.3 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 three quarters of 2023. During the nine months ended September 30, 2023, the Company repurchased 25,615 shares of common stock at a total cost of $196,000, and the Company paid $422,000 in dividends attributable to noncontrolling interest during the same period. 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 September 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.1 million for the three months ended September 30, 2023, as compared to $2.8 million for the three months ended September 30, 2022, an decrease of $676,000. Net income available to common shareholders was $2.0 million, or $0.28 per common share, for the three months ended September 30, 2023, compared to $2.7 million, or $0.37 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. Earnings for the 2022 period included $1.5 million in recoveries of loan loss provision compared to provision expense of $599,000 during the 2023 period. The Company recorded a provision for credit losses on loans as a result of $44.6 million in loan growth during the three months ended September 30, 2023.

Net Interest Income

Net interest income for the three months ended September 30, 2023 was $8.2 million, a $965,000 increase from the $7.2 million reported for the comparative period in 2022. During the third quarter of 2023, the average yield on our interest-earning assets increased 137 basis points to 4.70% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 145 basis points to 1.95%. These changes resulted in a lower interest rate spread of 2.76% as of September 30, 2023, compared to 2.84% as of September 30, 2022. The Company’s net interest margin was 3.30% and 2.99% for the comparable periods

32


 

in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and four times during the first nine months of 2023 for a total of 525 basis points, repricing many of the Company’s variable rate assets and deposit funding sources.

The following table presents average balance sheet and a net interest income analysis for the three months ended September 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

 

$

299,584

 

 

$

279,567

 

 

$

2,764

 

 

$

1,577

 

 

 

3.66

%

 

 

2.24

%

Non-taxable securities (1)

 

 

58,470

 

 

 

69,250

 

 

 

317

 

 

 

391

 

 

 

2.69

%

 

 

2.76

%

Short-term investments

 

 

86,467

 

 

 

147,782

 

 

 

979

 

 

 

725

 

 

 

4.49

%

 

 

1.95

%

Equity securities

 

 

303

 

 

 

327

 

 

 

5

 

 

 

5

 

 

 

6.55

%

 

 

6.07

%

Taxable loans

 

 

538,215

 

 

 

463,589

 

 

 

7,570

 

 

 

5,298

 

 

 

5.58

%

 

 

4.53

%

Non-taxable loans (1)

 

 

13,325

 

 

 

12,957

 

 

 

75

 

 

 

69

 

 

 

2.80

%

 

 

2.60

%

Total interest-earning assets

 

 

996,364

 

 

 

973,472

 

 

 

11,710

 

 

 

8,065

 

 

 

4.70

%

 

 

3.34

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

689,896

 

 

 

651,089

 

 

 

3,188

 

 

 

513

 

 

 

1.83

%

 

 

0.31

%

Short-term borrowed funds

 

 

976

 

 

 

1,111

 

 

 

11

 

 

 

2

 

 

 

4.47

%

 

 

0.71

%

Long-term debt

 

 

29,076

 

 

 

29,542

 

 

 

334

 

 

 

338

 

 

 

4.56

%

 

 

4.54

%

Total interest bearing liabilities

 

 

719,948

 

 

 

681,742

 

 

 

3,533

 

 

 

853

 

 

 

1.95

%

 

 

0.50

%

Net interest spread

 

$

276,416

 

 

$

291,730

 

 

$

8,177

 

 

$

7,212

 

 

 

2.76

%

 

 

2.84

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.30

%

 

 

2.99

%

(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 $599,000 for the three months ended September 30, 2023, compared to a recovery of $1.5 million for the same period in 2022. There were net loan charge-offs of $196,000 for the three months ended September 30, 2023, as compared to net loan charge-offs of $21,000 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 $281,000 for the three-month period ended September 30, 2023, as compared to the same period in 2022. Other service fees and commissions, primarily from increased advisory fees and commissions earned by the investment division, contributed $112,000 to the increase in total noninterest income. This increase was supplemented by an improvement of $138,000 in income from mortgage banking due to increased mortgage loan production in the third quarter of 2023 compared to the third quarter of 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 September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Income from debit card transactions

 

$

579

 

 

$

552

 

Income from credit card transactions

 

 

168

 

 

 

165

 

Gross interchange and transaction fee income

 

 

747

 

 

 

717

 

Network costs - debit card

 

 

279

 

 

 

246

 

Network costs - credit card

 

 

177

 

 

 

156

 

Total

 

$

291

 

 

$

315

 

 

33


 

Noninterest Expense

Noninterest expense for the three months ended September 30, 2023 remained relatively flat decreasing by $10,000 from the same period in 2022.

Total other noninterest expense decreased $9,000 for the three months ended September 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 September 30,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Franchise and other taxes

 

$

19

 

 

$

41

 

Office supplies and printing

 

 

21

 

 

 

30

 

Employee education

 

 

27

 

 

 

43

 

Shareholder relations expense

 

 

44

 

 

 

31

 

Telephone and data lines

 

 

49

 

 

 

52

 

Postage

 

 

57

 

 

 

48

 

Director fees and expense

 

 

78

 

 

 

80

 

Dues and subscriptions

 

 

79

 

 

 

69

 

Other

 

 

217

 

 

 

206

 

Total

 

$

591

 

 

$

600

 

Income Tax Expense

The Company had income tax expense of $558,000 for the three months ended September 30, 2023 at an effective tax rate of 20.6% compared to income tax expense of $737,000 with an effective tax rate of 20.7% 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.

Results of Operations for the Nine Months Ended September 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $6.3 million for the nine months ended September 30, 2023, as compared to $5.3 million for the nine months ended September 30, 2022, an increase of $1.0 million. Net income available to common shareholders was $5.9 million, or $0.82 per common share, for the nine months ended September 30, 2023, compared to $4.9 million, or $0.67 per common share, for the nine months ended September 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 nine months ended September 30, 2023 was $24.1 million, a $4.3 million increase from the $19.8 million reported for the comparative period in 2022. During the first nine months of 2023, the average yield on our interest-earning assets increased 140 basis points to 4.54% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 131 basis points to 1.70%. These changes resulted in a higher interest rate spread of 2.84% as of September 30, 2023, compared to 2.75% as of September 30, 2022. The Company’s net interest margin was 3.32% and 2.87% for the comparable periods in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and four times in the first nine months of 2023 for a total of 525 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 nine months ended September 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

 

$

297,875

 

 

$

287,174

 

 

$

7,879

 

 

$

3,820

 

 

 

3.54

%

 

 

1.78

%

Non-taxable securities (1)

 

 

60,656

 

 

 

67,093

 

 

 

1,010

 

 

 

1,119

 

 

 

2.79

%

 

 

2.75

%

Short-term investments

 

 

96,732

 

 

 

118,856

 

 

 

3,230

 

 

 

1,012

 

 

 

4.46

%

 

 

1.14

%

Equity securities

 

 

307

 

 

 

367

 

 

 

15

 

 

 

15

 

 

 

6.53

%

 

 

5.46

%

Taxable loans

 

 

516,158

 

 

 

455,466

 

 

 

20,791

 

 

 

15,588

 

 

 

5.39

%

 

 

4.58

%

Non-taxable loans (1)

 

 

12,684

 

 

 

10,623

 

 

 

210

 

 

 

183

 

 

 

2.77

%

 

 

2.84

%

Total interest-earning assets

 

 

984,412

 

 

 

939,579

 

 

 

33,135

 

 

 

21,737

 

 

 

4.54

%

 

 

3.14

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

680,713

 

 

 

622,542

 

 

 

8,016

 

 

 

903

 

 

 

1.57

%

 

 

0.19

%

Short-term borrowed funds

 

 

977

 

 

 

1,109

 

 

 

30

 

 

 

3

 

 

 

4.11

%

 

 

0.36

%

Long-term debt

 

 

29,257

 

 

 

29,547

 

 

 

1,000

 

 

 

1,011

 

 

 

4.57

%

 

 

4.57

%

Total interest-bearing liabilities

 

 

710,947

 

 

 

653,198

 

 

 

9,046

 

 

 

1,917

 

 

 

1.70

%

 

 

0.39

%

Net interest spread

 

$

273,465

 

 

$

286,381

 

 

$

24,089

 

 

$

19,820

 

 

 

2.84

%

 

 

2.75

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.32

%

 

 

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 $985,000 for the nine months ended September 30, 2023, compared to a recovery of $1.4 million for the same period in 2022. There were net loan charge-offs of $572,000 for the nine months ended September 30, 2023, as compared to net loan recoveries of $42,000 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 $68,000 for the nine-month period ended September 30, 2023, as compared to the same period in 2022. Income from mortgage banking, included in noninterest income, declined $716,000 during the aforementioned period. This decrease is due to the reduction in production, particularly mortgage refinancing activity, as interest rates rose sharply during 2022 and continued to rise into 2023. Positive market adjustments on supplemental executive retirement plans of $588,000, an increase in other service fees and commissions of $121,000 and an improvement in the fair market value of equity securities of $78,000 more than 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:

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Income from debit card transactions

 

$

1,710

 

 

$

1,635

 

Income from credit card transactions

 

 

507

 

 

 

465

 

Gross interchange and transaction fee income

 

 

2,217

 

 

 

2,100

 

Network costs - debit card

 

 

823

 

 

 

777

 

Network costs - credit card

 

 

484

 

 

 

467

 

Total

 

$

910

 

 

$

856

 

 

35


 

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2023 increased by $534,000 from the same period in 2022, to $22.4 million. Positive market adjustments on supplemental executive retirement plans of $588,000 was the primary contributor to the increase in total noninterest expense.

Total other noninterest expense decreased $31,000 for the nine months ended September 30, 2023, compared to the same period in 2022. The table below reflects the composition of other noninterest expense for the referenced periods.

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Office supplies and printing

 

$

67

 

 

$

73

 

Franchise and other taxes

 

 

91

 

 

 

117

 

Employee education

 

 

110

 

 

 

111

 

Shareholder relations expense

 

 

132

 

 

 

104

 

Telephone and data lines

 

 

147

 

 

 

157

 

Postage

 

 

169

 

 

 

165

 

Dues and subscriptions

 

 

220

 

 

 

219

 

Director fees and expense

 

 

246

 

 

 

257

 

Other

 

 

576

 

 

 

586

 

Total

 

$

1,758

 

 

$

1,789

 

Income Tax Expense

The Company had income tax expense of $1.6 million for the nine months ended September 30, 2023 at an effective tax rate of 20.3% compared to income tax expense of $1.2 million with an effective tax rate of 18.6% 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 nine months ended September 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.

36


 

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.

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 September 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 $719,000.

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 September 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 September 30, 2023 required a reduction of 6 basis points in allowance as a percentage of loans.

The ratio of nonaccrual loans to total loans increased from 0.08% at December 31, 2022 to 0.14% at September 30, 2023, and was related to the $422,000 increase in nonaccrual loans. Three loans were converted to nonaccrual during the first nine months 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 September 30, 2023 compared to $0 at December 31, 2022 as there was one loan foreclosed on during the first quarter of 2023.

As of September 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 September 30, 2023 and December 31, 2022:

Nonperforming Assets

(dollars in thousands)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

Nonperforming assets:

 

 

 

 

 

 

Accruing loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

821

 

 

 

399

 

Other real estate owned

 

 

141

 

 

 

 

Total nonperforming assets

 

$

962

 

 

$

399

 

Allowance for credit losses on loans

 

$

5,115

 

 

$

2,290

 

Nonaccrual loans to total loans

 

 

0.14

%

 

 

0.08

%

Allowance for credit losses on loans to total loans

 

 

0.88

%

 

 

0.46

%

Allowance for credit losses on loans to nonaccrual loans

 

 

623.02

%

 

 

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 38% of total deposits at September 30,

37


 

2023 and December 31, 2022. 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 September 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 $145.9 million; and access to borrowings from the Federal Reserve Bank discount window, with available credit of $14.9 million. In March 2023, the Federal Reserve established a Bank Term Funding Program (“BTFP”) which offers loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The assets are valued at par. The Company had approximately $66.3 million of additional liquidity available through the BTFP at September 30, 2023. 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 September 30, 2023, $3.0 million remained available for 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 September 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.

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Interest-earning cash and cash equivalents

 

 

68,407

 

 

 

109,224

 

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

 

 

 

 

 

 

Total loans held for investment

 

 

11.8

%

 

 

21.9

%

Total earning assets

 

 

6.8

%

 

 

11.3

%

Total deposits

 

 

6.9

%

 

 

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 September 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 $10.7 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 $10.7 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 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 September 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.

38


 

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.

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 third 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, Use of Proceeds, and Issuer Purchases of Equity Securities.

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

 

July 1, 2023 Through July 31, 2023

 

 

 

 

$

 

 

 

 

 

$

 

August 1, 2023 Through August 31, 2023

 

 

3,678

 

 

$

7.42

 

 

 

 

 

$

 

September 1, 2023 Through September 30, 2023

 

 

4,659

 

 

$

7.71

 

 

 

 

 

$

 

Total

 

 

8,337

 

 

$

7.58

 

 

 

 

 

$

 

(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.

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Item 6. Exhibits.

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

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

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

 

31.2

 

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

 

32

 

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

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 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:

 

November 7, 2023

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

November 7, 2023

 

By:

 

/s/ Heather H. Almond

 

 

 

 

Heather H. Almond

 

 

 

 

Principal Financial Officer

 

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