UWHARRIE CAPITAL CORP Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: the impact of the novel Coronavirus disease, or COVID-19, and its variants on our borrowers' ability to meet their financial obligations to us; increases in our past due loans and provisions for loan losses that may result from COVID-19 and its broader economic effects, including labor shortages, supply chain issues, and inflation that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets due to COVID-19 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
During the nine months ended
Cash and cash equivalents increased
Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased$9.4 million to$351.7 million for the nine-month period endedSeptember 30, 2022 . AtSeptember 30, 2022 , the Company had unrealized losses on securities available for sale of$44.2 million , compared to unrealized losses of$1.5 million atDecember 31, 2021 . The significant decline in fair value is directly related to the increase in market interest rates atSeptember 30, 2022 compared toDecember 31, 2021 , as theU.S. Treasury yield curve reacts to substantial increases in the federal funds rate by theFederal Reserve .
At
Loans held for sale decreased 78.1%, or$16.9 million , as mortgage loan production has slowed during 2022 and many of the loans produced near theDecember 31, 2021 quarter-end date were not sold on the secondary market until 2022. Loans held for investment increased from$420.8 million to$477.2 million , an increase of$56.4 million for the nine-month period endedSeptember 30, 2022 . The Company experienced a net increase in all loan sectors with the exception of real estate 1-4 family construction, consumer loans, other loans and SBA PPP loans. SBA PPP loans were issued during 2020 and 2021 as a result of the federal government's response to helping small businesses due to COVID-related issues. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA if the loans comply with PPP requirements. The allowance for loan losses was$2.7 million atSeptember 30, 2022 , which represented 0.56% of the total loans held for investment, compared to$4.0 million or 0.96% of the total loans held for investment atDecember 31, 2021 . Additional discussion regarding the allowance is included in the Asset Quality section below. Other changes in our consolidated assets are primarily related to deferred tax assets, which increased$9.8 million from$1.7 million as ofDecember 31, 2021 to$11.6 million atSeptember 30, 2022 as a result of the significant decline in value of the available for sale security portfolio. Additionally, restricted stock increased$507,000 for the same period mainly due to the increase in FRB stock required to be held from increased common equity. Customer deposits, our primary funding source, experienced a$126.8 million increase during the nine-month period endedSeptember 30, 2022 , increasing from$836.8 million to$963.6 million , a 15.2% increase. In addition to receipt of government grant funding by some depositors, a large portion of this increase is related to the overall growth in the number of deposit accounts and relationship sizes. As the banking subsidiary of the Company operates in a primarily rural market, many competitors have exited the markets where we remain, which has driven deposit growth in our current markets. Demand noninterest-bearing checking accounts increased$53.7 million , interest checking and money market accounts increased$76.6 million and savings deposits increased$3.7 million during the nine months endedSeptember 30, 2022 . Time deposits decreased by$7.2 million during the same period as customers transitioned to liquid accounts. Total short-term borrowings increased$22,000 for the nine-month period endedSeptember 30, 2022 . AtSeptember 30, 2022 , the Company had$29.6 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 ofSeptember 30 , -28- -------------------------------------------------------------------------------- 2029 that may be redeemed on or afterSeptember 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 onSeptember 3, 2031 , though redeemable on or afterSeptember 3, 2026 , and initially pay interest quarterly at an annual rate of 3.5%. From and includingSeptember 3, 2026 to but excludingSeptember 3, 2031 , or up to an 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 onSeptember 3, 2036 , though redeemable on or afterSeptember 3, 2031 , and initially pay interest quarterly at an annual rate of 4.0%. From and includingSeptember 3, 2031 to but excludingSeptember 3, 2036 , or up to an 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 atSeptember 30, 2022 . Mortgage banking derivatives increased$170,000 from$50,000 atDecember 31, 2021 to$220,000 atSeptember 30, 2022 , because of the rise in interest rates since year-end. As rates rise, the value of mandatory mortgage forward sales commitments deteriorate, and the price required to exit out of the commitment decreases. Additionally, the value associated with IRLCs has depreciated to a liability position as market rates now exceed interest rates committed to borrowers. Other liabilities increased$237,000 fromDecember 31, 2021 toSeptember 30, 2022 primarily related to adjustments of reserves in order to align these accounts with current earnings. AtSeptember 30, 2022 , total shareholders' equity was$32.5 million , a decrease of$28.3 million fromDecember 31, 2021 . This decline is a result of unrealized losses on investment securities, net of tax, increasing by$32.9 million as the yield curve continues to steepen. Net income for the nine-month period endedSeptember 30, 2022 was$5.3 million . The Company repurchased 30,895 shares of common stock at a total cost of$268,000 during the first nine months of 2022. During the same period, the Company paid$422,000 in dividends attributable to noncontrolling interest. See Note 3 (Noncontrolling Interest) to the Company's Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.
Results of Operations for the Three Months Ended
Net Income and Net Income Available to Common Shareholders
Uwharrie Capital Corp reported net income of$2.8 million for the three months endedSeptember 30, 2022 , as compared to$2.7 million for the three months endedSeptember 30, 2021 , an increase of$141,000 . Net income available to common shareholders was$2.7 million , or$0.38 per common share, for the three months endedSeptember 30, 2022 , compared to$2.5 million , or$0.35 per common share, atSeptember 30, 2021 . Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.
Net Interest Income
Net interest income for the three months endedSeptember 30, 2022 was$7.2 million , compared to$7.0 million for the three months endedSeptember 30, 2021 , an increase of$230,000 . During the third quarter of 2022, the average yield on our interest-earning assets decreased twenty basis points to 3.34% from the same period in 2021, and the average rate we paid for our interest-bearing liabilities increased twenty-four basis points to 0.50%. These changes resulted in a lower interest rate spread of 2.84% as ofSeptember 30, 2022 , compared to 3.28% as ofSeptember 30, 2021 . The Company's net interest margin was 2.99% and 3.37% for the comparable periods in 2022 and 2021, respectively. -29- --------------------------------------------------------------------------------
The following table presents average balance sheet and a net interest income
analysis for the three months ended
Average Balance Sheet and Net Interest Income Analysis
For the Three Months Ended September 30 ,(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2022 2021 2022 2021 2022 2021
Interest-earning assets:
Taxable securities $ 279,567 $ 214,624 $ 1,577 $ 740 2.24 % 1.37 %
Non-taxable securities (1) 69,250 53,967 391 309 2.76 % 2.88 %
Short-term investments 147,782 120,014 725 53 1.95 % 0.18 %
Equity securities 327 411 5 5 6.07 % 4.83 %
Taxable loans 463,589 437,845 5,298 6,191 4.53 % 5.61 %
Non-taxable loans (1) 12,957 7,326 69 51 2.60 % 3.48 %
Total interest-earning assets 973,472 834,187 8,065 7,349 3.34 % 3.54 %
Interest-bearing liabilities:
Interest-bearing deposits 651,089 546,252 513 176 0.31 % 0.13 %
Short-term borrowed funds 1,111 1,167 2 1 0.71 % 0.34 %
Long-term debt 29,542 16,000 338 192 4.54 % 4.76 %
Total interest bearing
liabilities 681,742 563,419 853 369 0.50 % 0.26 %
Net interest spread $ 291,730 $ 270,768 $ 7,212 $ 6,980 2.84 % 3.28 %
Net interest margin (1) (% of
earning assets) 2.99 % 3.37 %
(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 (Recovery) and Allowance for Loan Losses
The recovery of allowance for loan losses was$1.5 million for the three months endedSeptember 30, 2022 , compared to a recovery of$1.1 million for the same period in 2021. There were net loan chargeoffs of$21,000 for the three months endedSeptember 30, 2022 , as compared to net loan recoveries of$553,000 during the same period of 2021. Refer to the Asset Quality section below for further information. Noninterest Income The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income decreased by$2.3 million for the three-month period endedSeptember 30, 2022 , as compared to the same period in 2021. Declines in market valuation adjustments on supplemental executive retirement plans contributed approximately$860,000 to this decrease. Another significant factor contributing to the overall change in noninterest income was a decrease of$1.5 million in income from mortgage banking. This decline is due to the significant reduction in production, particularly mortgage refinancing activity, as interest rates have risen steadily during 2022. Interchange fees, or "swipe" fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below: Three Months Ended September 30, 2022 2021 (in thousands) Income from debit card transactions $ 552 $ 535 Income from credit card transactions 165 130 Gross interchange and transaction fee income 717 665 Network costs - debit card 246 249 Network costs - credit card 156 155 Total $ 315 $ 261 -30-
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Noninterest Expense
Noninterest expense for the three months endedSeptember 30, 2022 decreased by$1.8 million from the same period in 2021, to$7.4 million . Salaries and benefits, the largest component of noninterest expense, decreased$965,000 due to decreased commissions from reduced production in the mortgage division. As a result of production declines in the mortgage division, loan costs decreased by$100,000 to$92,000 for the three months endedSeptember 30, 2022 . Market valuation adjustments decreased the expense associated with supplemental executive retirement plans by$860,000 .
Total other noninterest expense decreased
Three Months Ended September 30,
2022 2021
(dollars in thousands)
Postage $ 48 $ 47
Telephone and data lines 52 48
Office supplies and printing 30 25
Shareholder relations expense 31 58
Dues and subscriptions 69 80
Other 370 358
Total $ 600 $ 616
Income Tax Expense
The Company had income tax expense of $737,000 for the three months ended
September 30, 2022 at an effective tax rate of 20.7% compared to income tax
expense of $732,000 with an effective tax rate of 21.4% in the comparable 2021
period. Income taxes computed at the statutory rate are primarily affected by
the state income tax expense offset by the eligible amount of interest earned on
state and municipal securities, tax-free municipal loans and income earned on
bank-owned life insurance. For the three months ended September 30, 2022 , the
effective tax rate decreased due to the increase in tax-exempt security
holdings.
Results of Operations for the Nine Months Ended
Net Income and Net Income Available to Common Shareholders
Uwharrie Capital Corp reported net income of$5.3 million for the nine months endedSeptember 30, 2022 , as compared to$8.9 million for the nine months endedSeptember 30, 2021 , a decrease of$3.6 million . Net income available to common shareholders was$4.9 million , or$0.69 per common share, for the nine months endedSeptember 30, 2022 , compared to$8.4 million , or$1.14 per common share, atSeptember 30, 2021 . 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 endedSeptember 30, 2022 and 2021 was$19.8 million . During the first nine months of 2022, the average yield on our interest-earning assets decreased thirty-eight basis points to 3.14% from the same period in 2021, and the average rate we paid for our interest-bearing liabilities increased fourteen basis points to 0.39%. These changes resulted in a lower interest rate spread of 2.75% as ofSeptember 30, 2022 , compared to 3.27% as ofSeptember 30, 2021 . The Company's net interest margin was 2.87% and 3.35% for the comparable periods in 2022 and 2021, respectively. -31- --------------------------------------------------------------------------------
The following table presents average balance sheet and a net interest income
analysis for the nine months ended
Average Balance Sheet and Net Interest Income Analysis
For the Nine Months Ended September 30,
(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2022 2021 2022 2021 2022 2021
Interest-earning assets:
Taxable securities $ 287,174 $ 198,826 $ 3,820 $ 2,247 1.78 % 1.51 %
Non-taxable securities (1) 67,093 44,166 1,119 793 2.75 % 3.05 %
Short-term investments 118,856 95,128 1,012 96 1.14 % 0.13 %
Equity securities 367 511 15 15 5.46 % 3.92 %
Taxable loans 455,466 452,590 15,588 17,477 4.58 % 5.16 %
Non-taxable loans (1) 10,623 7,744 183 162 2.84 % 3.55 %
Total interest-earning assets 939,579 798,965 21,737 20,790 3.14 % 3.52 %
Interest-bearing liabilities:
Interest-bearing deposits 622,542 523,916 903 562 0.19 % 0.14 %
Short-term borrowed funds 1,109 1,345 3 3 0.36 % 0.30 %
Long-term debt 29,547 12,710 1,011 463 4.57 % 4.87 %
Total interest-bearing
liabilities 653,198 537,971 1,917 1,028 0.39 % 0.26 %
Net interest spread $ 286,381 $ 260,994 $ 19,820 $ 19,762 2.75 % 3.27 %
Net interest margin (1) (% of
earning assets) 2.87 % 3.35 %
(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 (Recovery) and Allowance for Loan Losses
The recovery of allowance for loan losses was$1.4 million for the nine months endedSeptember 30, 2022 , compared to a recovery of$1.2 million for the same period in 2021. There were net loan recoveries of$42,000 for the nine months endedSeptember 30, 2022 , as compared to net loan recoveries of$500,000 during the same period of 2021. Refer to the Asset Quality section below for further information. Noninterest Income The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income decreased by$8.7 million for the nine-month period endedSeptember 30, 2022 , as compared to the same period in 2021. The gain on sale of securities decreased$1.1 million to a loss of$91,000 atSeptember 30, 2022 compared to a gain of$991,000 atSeptember 30, 2021 as the Company worked to reduce the duration of the investment portfolio in an attempt to protect capital as long-term interest rates rise. Negative market adjustments of supplemental executive retirement plans contributed$1.8 million to the reduction in total noninterest income. The primary factor contributing to the overall decline in noninterest income was a decrease of$6.2 million in income from mortgage banking. This decrease is due to the significant reduction in production, particularly mortgage refinancing activity, as interest rates have risen steadily during 2022. Interchange fees, or "swipe" fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below: Nine Months Ended September 30, 2022 2021 (in thousands) Income from debit card transactions $ 1,635 $ 1,563 Income from credit card transactions 465 373 Gross interchange and transaction fee income 2,100 1,936 Network costs - debit card 777 680 Network costs - credit card 467 437 Total $ 856 $ 819 -32-
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Noninterest Expense
Noninterest expense for the nine months endedSeptember 30, 2022 decreased by$3.8 million from the same period in 2021, to$21.8 million . Salaries and benefits, the largest component of noninterest expense, decreased$1.7 million due to decreased commissions from reduced production in the mortgage division. As a result of production declines in the mortgage division, volume-driven loan costs decreased by$333,000 to$356,000 for the nine months endedSeptember 30, 2022 . Marketing and donations decreased$138,000 to$898,000 for the same time period. Total other noninterest expense increased$94,000 for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Increases in postage, business insurance, employee education and franchise tax expense contributed to this overall increase. The table below reflects the composition of other noninterest expense. Nine Months Ended September 30, 2022 2021 (in thousands) Postage $ 165 $ 150 Telephone and data lines 157 146 Office supplies and printing 73 77 Shareholder relations expense 104 130 Dues and subscriptions 219 286 Other 1,071 906 Total $ 1,789 $ 1,695 Income Tax Expense The Company had income tax expense of$1.2 million for the nine months endedSeptember 30, 2022 at an effective tax rate of 18.6% compared to income tax expense of$2.4 million with an effective tax rate of 21.2% in the comparable 2021 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 endedSeptember 30, 2022 , the effective tax rate decreased due to the increase in tax-exempt security holdings.
Asset Quality
The Company's allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower's ability to repay; estimated value of any underlying collateral; prevailing economic conditions; and other relevant factors. The Company's credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan's credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower's risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management. Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers 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 loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history, and the current delinquent status. Because of this process, certain loans are deemed to be impaired and evaluated as an impaired loan. The portion of the Company's allowance for loan loss model related to general reserves captures the mean loss of individual loans within the loan portfolio and adds additional loss based on economic uncertainty and specific indicators of potential issues in the market. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience. An additional calculation based on economic uncertainty is added to the probable losses, thus deriving the estimated loss scenario byFDIC call report codes. Together, these expected components, as well as -33- -------------------------------------------------------------------------------- a reserve for qualitative factors based on current economic conditions determined at management's discretion, form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations. The Company assesses the probability of losses inherent in the loan portfolio using probability of default data derived from the Company's internal historical data, representing a one-year loss horizon for each obligor. Credit scores are used within the model to determine the probability of default. The Company updates the credit scores for individuals that either have a loan, or are financially responsible for the loan, semi-annually, during the first and third quarters. During the first nine months of 2022, the average effective credit score of the portfolio, excluding loans in default, increased slightly from 767 to 772. The probability of default associated with each credit score is a major driver in the allowance for loan losses. The allowance for loan losses represents management's best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company's portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Unexpected global events, such as the unprecedented economic disruption due to COVID-19, are the type of future events that often cause material adjustments to the allowance to be necessary. Any material increase in the allowance for loan losses may adversely affect the Company's financial condition, results of operations and the value of its securities. AtSeptember 30, 2022 , the level of our impaired loans, which includes all loans in non-accrual status, TDRs, and other loans deemed by management to be impaired, was$2.9 million , compared to$4.7 million atDecember 31, 2021 , a net decrease of$1.8 million . The decrease is related to two large relationships paying off during 2022. Total non-accrual loans, which are a component of impaired loans, decreased from$972,000 atDecember 31, 2021 to$201,000 atSeptember 30, 2022 . During the first nine months of 2022, three loans totaling$610,000 were added to impaired loans; however, ten loans totaling$2.3 million were paid off. We also received net pay downs of$148,000 . The allowance, expressed as a percentage of gross loans held for investment, decreased forty basis points from 0.96% atDecember 31, 2021 to 0.56% atSeptember 30, 2022 . The collectively evaluated allowance as a percentage of collectively evaluated loans was 0.92% atDecember 31, 2021 and 0.52% atSeptember 30, 2022 . The decrease is attributable to continued improvement in probability of defaults of the portfolio as impacted by external economic factors. InDecember 2019 , prior to the global COVID-19 pandemic, our collectively evaluated allowance as a percentage of collectively evaluated loans was 0.55%. Due to COVID-19 impacts to the global economy and the uncertainty within our economic markets, our allowance for loan loss model indicated a need for additional reserves due to external factors that are more likely to indicate losses for the loan portfolio. By the end of 2020, the collectively evaluated allowance as a percentage of collectively evaluated loans increased nearly double to 0.94%. The model results as ofSeptember 30, 2022 reflect the Company's risk in the loan portfolio based on economic indicators of default applicable to our loan portfolio, primarily associated with NC unemployment and the NC-Charlotte region Case Shiller index. Signs of asset quality improvements are evident of support for reduced reserves as impaired loans fell to an all-time low of$2.9 million atSeptember 30, 2022 and non-accrual loans fell to their all-time low of$201 thousand . The individually evaluated allowance as a percentage of individually evaluated loans increased from 4.54% to 6.53% for the same periods, mainly due to the payoff of one large relationship with little reserves associated due to collateral values.
The ratio of nonperforming loans, which consists of non-accrual loans and loans
past due 90 days and still accruing, to total loans decreased from 0.23% at
Troubled debt restructured loans, included in impaired loans, totaled
Other real estate owned remained at
As of
-34-
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The following table shows the comparison of nonperforming assets at
Nonperforming Assets
(dollars in thousands)
September 30, 2022 December 31, 2021
Nonperforming assets:
Accruing loans past due 90 days or more $ - $ -
Non-accrual loans 201 972
Other real estate owned - -
Total nonperforming assets $ 201 $ 972
Allowance for loans losses $ 2,661 $ 4,026
Nonaccrual loans to total loans 0.04 % 0.23 %
Allowance for loan losses to total loans 0.56 % 0.96 %
Allowance for loan losses to nonaccrual loans 1323.88 % 414.20 %
Liquidity and Capital Resources
The objective of the Company's liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature and to fund new loans and investments as opportunities arise. The Company's primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. AtSeptember 30, 2022 , these sources are 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 theFederal Home Loan Bank , with available credit of$115.2 million ; access to borrowings from theFederal Reserve Bank discount window, with available credit of$17.6 million and the issuance of commercial paper. The Company also has a$3.0 million line of credit with TIBThe Independent BankersBank, N.A. The line is secured with 100% of the outstanding common shares of the Company's subsidiary bank. As ofSeptember 30, 2022 ,$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$29.5 million of junior subordinated debt at bothSeptember 30, 2022 andDecember 31, 2021 . Banks and bank holding companies, as regulated institutions, must meet required levels of capital. TheFederal 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
The Company's subsidiary bank has a net total of$10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of$10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. AtSeptember 30, 2022 , the Company had$29.5 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. -35- --------------------------------------------------------------------------------
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 throughSeptember 30, 2022 , with the exception of mortgage banking derivatives. See Note 14 (Mortgage Banking Derivatives) to the Company's Notes to Consolidated Financial Statements for additional discussion of mortgage banking derivatives.
Contractual Obligations
The timing and amount of our contractual obligations has not changed materially since our 2021 Annual Report on Form 10-K, which was filed with theSecurities and Exchange Commission onMarch 9, 2022 . Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Disclosure under this item is not required for smaller reporting companies.
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