Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: the impact of the novel Coronavirus disease, or COVID-19, on our borrowers' ability to meet their financial obligations to us; increases in our past due loans and provisions for loan losses that may result from COVID-19; declines in general economic conditions, including increased stress in the financial markets due to COVID-19; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. Any use of "we" or "our" in the following discussion refers to the Company on a consolidated basis.
Comparison of Financial Condition at
During the six months ended
Cash and cash equivalents decreased$43.3 million during the six months endedJune 30, 2020 . The decrease is directly related to the increased investments made in the securities portfolio in an effort to sustain the yield on earning assets after rates dropped significantly during the first quarter. Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased$36.0 million to$137.9 million for the six-month period endedJune 30, 2020 , due to investments of cash into longer-term, higher yielding assets. AtJune 30, 2020 , the Company had net unrealized gains on securities available for sale of$4.1 million , compared to net unrealized gains of$419,000 asDecember 31, 2019 . The significant improvement is directly related to the decline of the bond yields atJune 30, 2020 compared toDecember 31, 2019 , as the market reacted to the COVID-19 outbreak worldwide. An additional investment was made into an equity security during the six months endedJune 30, 2020 of$901,000 . The value of the equity security increased$333,000 by the end of the second quarter, resulting in a fair value of$1.2 million for the security atJune 30, 2020 . Loans held for investment increased from$358.0 million to$454.9 million , an increase of$96.9 million for the six-month period. The Company experienced net growth in nearly all sectors with the largest increase (not including PPP loans) occurring in the other real estate construction segment related to funding on two large hotel loans. During the second quarter of 2020, the Company funded 1,004 SBA PPP loans for a total of$77.3 million . These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. Loans held for sale increased 48.3%, or$1.4 million , as many of the loans produced near theJune 30, 2020 quarter-end date were not sold on the secondary market until early July. The increase in re-finance activity due to a favorable interest rate environment for borrowers has increased production for the mortgage division of the Company. The allowance for loan losses was$3.4 million atJune 30, 2020 , which represented 0.75% of the total loans held for investment compared to$2.0 million or 0.55% of the total loans held for investment atDecember 31, 2019 . Additional discussion regarding the increase in the allowance is included in the Asset Quality section below. Other changes in our consolidated assets are primarily related to prepaid assets, other assets and loan servicing assets. Prepaid assets have increased$494,000 fromDecember 31, 2019 toJune 30, 2020 , as annual property and business insurance payments are due during the first quarter of the year. Other assets decreased$834,000 during the first six months of 2020, primarily due to the distribution of supplemental executive retirement plan benefits related to an executive retirement inJanuary 2020 . Loan servicing assets increased by$716,000 during the six-month period as a result of the aforementioned production growth within the Company's mortgage division. Customer deposits, our primary funding source, experienced an$88.2 million increase during the six-month period endedJune 30, 2020 , increasing from$585.9 million to$674.1 million , a 15.05% increase. A portion of this increase is related to funding of SBA PPP loans, some of the proceeds of which were deposited by our customers into their deposit accounts held at the Company's subsidiary bank. Demand noninterest-bearing checking accounts increased$55.3 million and savings deposits increased$9.1 million . Interest checking and money market accounts increased by$75.4 million , of which$41.0 million is related to an account that moved from time deposits greater than$250,000 . Other time deposits decreased$51.6 million during the six-month period endedJune 30, 2020 . -29- -------------------------------------------------------------------------------- Total short-term borrowings decreased$127,000 for the period due to a reduction in consumer overnight sweep accounts. AtJune 30, 2020 , the Company has$11.0 million in long-term debt outstanding, which consisted primarily of its fixed rate junior subordinated debt securities issued onSeptember 30, 2019 . The subordinated debt securities have a final maturity date ofSeptember 30, 2029 , though may be redeemed by the Company on or afterSeptember 30, 2024 . The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. The Company has a$3 million line of credit of which$1 million was in use atJune 30, 2020 .
Other liabilities decreased from
million
distribution of supplemental executive retirement plan benefits related to an
executive’s retirement in
AtJune 30, 2020 , total shareholders' equity was$52.7 million , an increase of$3.8 million fromDecember 31, 2019 . Net income for the six-month period was$1.9 million . Unrealized gains/losses on investment securities, net of tax, improved by$2.8 million . The Company repurchased 125,779 shares of common stock at a total cost of$691,000 during the first six months of 2020. The Company paid$282,000 in dividends attributed to noncontrolling interest during the first six months of 2020.
Comparison of Results of Operations for the Three Months Ended
2019.
Net Income and Net Income Available to Common Shareholders
Uwharrie Capital Corp reported net income of$1.6 million for the three months endedJune 30, 2020 , as compared to$951,000 for the three months endedJune 30, 2019 , an increase of$650,000 . Net income available to common shareholders was$1.5 million or$0.21 per common share, atJune 30, 2020 , compared to$811,000 or$0.11 per common share, atJune 30, 2019 . Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest. Net Interest Income Net interest income for the three months endedJune 30, 2020 was$5.3 million , compared to$5.0 million for the three months endedJune 30, 2019 , an increase of$312,000 . During the second quarter of 2020, the average yield on our interest-earning assets decreased forty-eight basis points to 3.51%, and the average rate we paid for our interest-bearing liabilities decreased thirty-nine basis points to 0.44%. The aforementioned changes resulted in a lower interest rate spread of 3.07% as ofJune 30, 2020 , compared to 3.16% as ofJune 30, 2019 . Our net interest margin was 3.20% and 3.38% for the comparable periods in 2020 and 2019, respectively.
The following table presents average balance sheet and a net interest income
analysis for the three months ended
Average Balance Sheet and Net Interest Income Analysis
For the Three Months Ended June 30,
(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2020 2019 2020 2019 2020 2019
Interest-earning assets: Taxable securities$ 108,672 $ 82,866 $ 569 $ 386 2.11 % 1.87 % Nontaxable securities (1) 26,274 16,839 195 104 3.75 % 3.10 % Short-term investments 109,195 125,399 38 687 0.14 % 2.20 % Taxable loans 422,246 365,105 4,961 4,680 4.73 % 5.14 % Non-taxable loans (1) 10,010 8,871 70 55 3.51 % 3.14 % Total interest-earning assets 676,397 599,080 5,833
5,912 3.51 % 3.99 %
Interest-bearing liabilities: Interest-bearing deposits 459,397 429,304 372 762 0.33 % 0.71 % Short-term borrowed funds 397 1,207 1 5 1.01 % 1.67 % Long-term debt 11,410 9,972 144 141 5.08 % 5.69 % Total interest bearing liabilities 471,204 440,483 517
908 0.44 % 0.83 %
Net interest spread$ 205,193 $ 158,597 $ 5,316
Net interest margin (1) (% of earning assets) 3.20 % 3.38 %
(1) Yields related to securities and loans exempt from income taxes are stated on
a fully tax-equivalent basis, assuming a 21% tax rate.
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Provision (Recovery) and Allowance for Loan Losses
The provision for loan losses was$767,000 for the three months endedJune 30, 2020 , compared to a recovery of$315,000 for the same period in 2019. There were net loan recoveries of$32,000 for the three months endedJune 30, 2020 , as compared with net loan recoveries of$347,000 during the same period of 2019. Refer to the Asset Quality section below for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by$2.2 million for the three-month period endedJune 30, 2020 , as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of$2.6 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates remained low during the second quarter of 2020.
In addition, an unrealized gain on an equity investment in preferred stock of
another bank produced gains of
income.
Interchange fees, or "swipe" fees, are charges that merchants pay to us and
other card-issuing banks for processing electronic payment transactions.
Interchange and card transaction fees consist of income from check card usage,
point-of-sale income from PIN-based debit card transactions, ATM service fees,
and credit card usage. A comparison of gross interchange and card transaction
fees and interchange and card transaction fees net of associated network costs
for the reported periods is presented in the table below:
Three Months Ended June 30,
2020 2019
(in thousands)
Income from debit card transactions $ 408 $ 389
Income from credit card transactions 91 112
Gross interchange and transaction fee income 499 501
Network costs - debit card 172 152
Network costs - credit card 145 145
Total net income $ 182 $ 204
Noninterest Expense
Noninterest expense for the three months ended June 30, 2020 increased by
$648,000 from June 30, 2019 , to $6.9 million . Salaries and benefits, the largest
component of noninterest expense, increased $778,000 to account for wage and
benefit cost increases as well as increased commissions for increased production
in the mortgage division. As a result of production growth in the mortgage
division, loan costs increased by $111,000 to $167,000 for the three months
ended June 30, 2020 . These increases were offset in part by a $401,000 decline
in supplemental executive retirement plan expenses due to market value
adjustments during the second quarter.
The table below reflects the composition of other noninterest expense.
Three Months Ended June 30,
2020 2019
(dollars in thousands)
Postage $ 47 $ 44
Telephone and data lines 47 46
Insurance expense 29 33
Shareholder relations expense 30 37
Dues and subscriptions 107 71
Other (167 ) 231
Total $ 93 $ 462
Income Tax Expense
The Company had income tax expense of $429,000 for the three months ended June
30, 2020 at an effective tax rate of 21.1% compared to income tax expense of
$277,000 with an effective tax rate of 22.5% in the comparable 2019 period.
Income taxes computed at the statutory rate are affected primarily by the
eligible amount of interest earned on state and municipal securities, tax-free
municipal loans and income earned on bank owned life insurance. In 2020, the
effective tax rate decreased slightly due to more impact from tax-free
instruments.
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Comparison of Results of Operations for the Six Months Ended
2019.
Net Income and Net Income Available to Common Shareholders
Uwharrie Capital Corp reported net income of$1.9 million for the six months endedJune 30, 2020 , as compared to$1.6 million for the six months endedJune 30, 2019 , an increase of$289,000 . Net income available to common shareholders was$1.6 million , or$0.23 per common share, atJune 30, 2020 , compared to$1.4 million or$0.19 per common share, atJune 30, 2019 . Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.
Net Interest Income
Net interest income for the six months endedJune 30, 2020 and 2019 was$10.2 million . During the first two quarters of 2020, the average yield on our interest-earning assets decreased forty basis points to 3.61%, and the average rate we paid for our interest-bearing liabilities decreased fifteen basis points to 0.60%. The aforementioned changes resulted in a lower interest rate spread of 3.01% as ofJune 30, 2020 , compared to 3.27% as ofJune 30, 2019 . Our net interest margin was 3.18% and 3.46% for the comparable periods in 2020 and 2019, respectively.
The following table presents average balance sheet and a net interest income
analysis for the six months ended
Average Balance Sheet and Net Interest Income Analysis
For the Six Months Ended June 30 ,
(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2020 2019 2020 2019 2020 2019
Interest-earning assets:
Taxable securities $ 98,527 $ 83,671 $ 1,062 $ 776 2.17 % 1.87 %
Nontaxable securities (1) 21,170 16,995 293 210 3.50 % 3.12 %
Short-term investments 130,037 127,055 590 1,480 0.91 % 2.35 %
Taxable loans 388,631 364,110 9,447 9,290 4.89 % 5.15 %
Non-taxable loans (1) 9,902 8,993 137 112 3.50 % 3.15 %
Total interest-earning assets 648,267 600,824 11,529
11,868 3.61 % 4.01 %
Interest-bearing liabilities: Interest-bearing deposits 449,040 434,726 1,100 1,359 0.49 % 0.63 % Short-term borrowed funds 449 1,326 2 11 0.90 % 1.67 % Long-term debt 10,701 9,973 275 283 5.17 % 5.72 % Total interest-bearing liabilities 460,190 446,025 1,377
1,653 0.60 % 0.75 %
Net interest spread$ 188,077 $ 154,799 $ 10,152
Net interest margin (1) (% of earning assets) 3.18 % 3.46 %
(1) Yields related to securities and loans exempt from income taxes are stated on
a fully tax-equivalent basis, assuming a 21% tax rate.
Provision (Recovery) and Allowance for Loan Losses
The provision for loan losses was$1.4 million for the six months endedJune 30, 2020 , compared to a recovery of$428,000 for the same period in 2019. There were net loan recoveries of$46,000 for the six months endedJune 30, 2020 , as compared with net loan recoveries of$319,000 during the same period of 2019. Refer to the Asset Quality section below for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by$3.5 million for the six-month period endedJune 30, 2020 , as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of$3.2 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates fell during the first quarter and remained historically low during the second quarter of 2020. -32- --------------------------------------------------------------------------------
In addition, an unrealized gain on an equity investment in preferred stock of
another bank produced gains of
income.
Interchange fees, or "swipe" fees, are charges that merchants pay to us and
other card-issuing banks for processing electronic payment transactions.
Interchange and card transaction fees consist of income from check card usage,
point-of-sale income from PIN-based debit card transactions, ATM service fees,
and credit card usage. A comparison of gross interchange and card transaction
fees and interchange and card transaction fees net of associated network costs
for the reported periods is presented in the table below:
Six Months Ended June 30,
2020 2019
(in thousands)
Income from debit card transactions $ 793 $ 731
Income from credit card transactions 212 219
Gross interchange and transaction fee income 1,005 950
Network costs - debit card 344 313
Network costs - credit card 287 239
Total net income $ 374 $ 398
Noninterest Expense
Noninterest expense for the six months ended June 30, 2020 increased by $1.2
million from June 30, 2019 , to $13.7 million . Salaries and benefits, the largest
component of noninterest expense, increased $1.1 million to account for wage and
benefit cost increase as well as increased commissions for increased production
in the mortgage division. As a result of production growth in the mortgage
division, loan costs increased by $109,000 to $254,000 for the six months ended
June 30, 2020 .
The table below reflects the composition of other noninterest expense.
Six Months Ended June 30,
2020 2019
(in thousands)
Postage $ 92 $ 108
Telephone and data lines 93 92
Office supplies and printing 51 60
Shareholder relations expense 64 77
Dues and subscriptions 171 132
Other 360 357
Total $ 831 $ 826
Income Tax Expense
The Company had income tax expense of $514,000 for the six months ended June 30,
2020 at an effective tax rate of 21.0% compared to income tax expense of
$460,000 with an effective tax rate of 21.9% in the comparable 2019 period.
Income taxes computed at the statutory rate are affected primarily by the
eligible amount of interest earned on state and municipal securities, tax-free
municipal loans and income earned on bank owned life insurance. In 2020, the
effective tax rate decreased slightly due to more impact from tax-free
instruments.
Asset Quality
The Company's allowance for loan losses is established through charges to
earnings in the form of a provision for loan losses. The allowance is increased
by provisions charged to operations and decreased by recoveries of amounts
previously charged off and is reduced by recovery of provisions and loans
charged off. Management continuously evaluates the adequacy of the allowance for
loan losses. In evaluating the adequacy of the allowance, management considers
the following: the growth, composition and industry diversification of the
portfolio; historical loan loss experience; current delinquency levels; adverse
situations that may affect a borrower's ability to repay; estimated value of any
underlying collateral; prevailing economic conditions; and other relevant
factors. The Company's credit administration function, through a review process,
periodically validates the accuracy of the initial risk grade assessment. In
addition, as a given loan's credit quality improves or deteriorates, the credit
administration department has the responsibility to change the borrower's risk
grade accordingly. For loans determined to be impaired, the allowance is based
on either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price, or the
estimated fair value of the underlying
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collateral less the selling costs. This evaluation is inherently subjective, as
it requires material estimates, including the amounts and timing of future cash
flows expected to be received on impaired loans, which may be susceptible to
significant change. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses and
may require additions for estimated losses based upon judgments different from
those of management.
Management uses a risk-grading program designed to evaluate the credit risk in
the loan portfolio. In this program, risk grades are initially assigned by loan
officers then reviewed and monitored by credit administration. This process
includes the maintenance of an internally classified loan list that is designed
to help management assess the overall quality of the loan portfolio and the
adequacy of the allowance for loan losses. In establishing the appropriate
classification for specific assets, management considers, among other factors,
the estimated value of the underlying collateral, the borrower's ability to
repay, the borrower's payment history, and the current delinquent status.
Because of this process, certain loans are deemed to be impaired and evaluated
as an impaired loan.
During the second quarter of 2020, management made adjustments to the allowance
for loan losses methodology. The qualitative factors were expanded to include
additional reserves for niche lending portfolios of hotel, retained interest in
the unguaranteed portion of Small Business Administration (SBA) Loans (not
including PPP loans), and SBA PPP loans. The risk in these portfolios is
measurable in addition to the standard probable loss calculation performed on
all non-impaired loans. With the impact of COVID-19 on all industries, the hotel
and SBA (non-PPP) loan categories on the Company's balance sheet have been
identified as having elevated credit risk. The SBA (non-PPP) reflects the
unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP
loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs
or there are reporting issues or duplicate funding of loans. These additional
reserves allocated $172,000 to the reserve that was not present prior to June
30, 2020 . In addition, management eliminated its qualitative factor based on a
21-day weighted average of the VIX index, a real-time index that measures the
expectation of the market's 30-day forward-looking volatility, and replaced it
with a multi-factor linear regression encompassing the following economic data:
Case Shiller for North Carolina (NC) home price index, NC unemployment rate,
2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly
average factor. This qualitative factor update increased provisions by
approximately $379,000 from March 31, 2020 to June 30, 2020 .
The allowance for loan losses represents management's best estimate of an
appropriate amount to provide for probable credit risk inherent in the loan
portfolio in the normal course of business. While management believes that it
uses the best information available to establish the allowance for loan losses,
future adjustments to the allowance may be necessary and results of operations
could be adversely affected if circumstances differ from the assumptions used in
making the determinations. Furthermore, while management believes it has
established the allowance for loan losses in conformity with generally accepted
accounting principles, there can be no assurance that banking regulators, in
reviewing the Company's portfolio, will not require an adjustment to the
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
increases will not be necessary, should the quality of any loans deteriorate
because of the factors discussed herein. Unexpected global events, such as the
unprecedented economic disruption due to COVID-19, are the type of future events
that often cause material adjustments to the allowance to be necessary. Any
material increase in the allowance for loan losses may adversely affect the
Company's financial condition and results of operations.
At June 30, 2020 , the levels of our impaired loans, which includes all loans in
non-accrual status, TDRs, and other loans deemed by management to be impaired,
were $8.6 million , compared to $6.8 million at December 31, 2019 , a net increase
of $1.8 million . The increase is related to one large relationship moving into
non-accrual status during the first quarter of 2020 and one large relationship
being modified as a TDR in the second quarter of 2020. Total non-accrual loans,
which are a component of impaired loans, increased from $2.9 million at December
31, 2019 to $3.9 million at June 30, 2020 . During the first six months of 2020,
five additional loans totaling $2.0 million were added to impaired loans;
however, two loans totaling $136,000 were closed. That was offset by net pay
downs of $112,000 .
The allowance, expressed as a percentage of gross loans held for investment,
increased twenty basis points from 0.55% at December 31, 2019 to 0.75% at June
30, 2020 . The collectively evaluated reserve allowance as a percentage of
collectively evaluated loans was 0.52% at December 31, 2019 and 0.74% at June
30, 2020 . The increase is attributable to the model adjustments discussed above
allowing additional economic factors to increase qualitative factors related to
the worldwide COVID-19 outbreak. This outbreak, which resulted in many
businesses closing and staff layoffs, led management to increase the allowance
allocated based on economic outlook in the model to the largest allowable based
on internal policy. The individually evaluated allowance as a percentage of
individually evaluated loans decreased from 2.06% to 1.53% for the same periods,
mainly due to the two large relationships totaling $1.7 million that were deemed
impaired during the first six months of 2020, though little reserve is
recognized based on the net realizable value. The portion of the Company's
allowance for loan loss model related to general reserves captures the mean loss
of individual loans within the loan portfolio and adds additional loss based on
economic uncertainty and specific indicators of potential issues in the market.
Specifically, the Company calculates probable losses on loans by computing a
probability of loss and multiplying that by a loss given default derived from
historical experience. An additional calculation based on economic uncertainty
is added to the probable losses, thus deriving the estimated loss scenario by
FDIC call report codes. Together, these expected components, as well
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as a reserve for qualitative factors based on management’s discretion of
economic conditions, form the basis of the allowance model. The loans that are
impaired and included in the specific reserve are excluded from these
calculations.
The Company assesses the probability of losses inherent in the loan portfolio using probability of default data derived from the Company's internal historical data, representing a one-year loss horizon for each obligor. Credit scores are used within the model to determine the probability of default. The Company updates the credit scores for individuals that either have a loan, or are financially responsible for the loan, semi-annually, during the first and third quarters. During the first six months of 2020, the average effective credit score of the portfolio, excluding loans in default, declined slightly from 770 to 768. The probability of default associated with each credit score is a major driver in the allowance for loan losses. The ratio of nonperforming loans, which consist of non-accrual loans and loans past due 90 days and still accruing, to total loans increased from 0.82% atDecember 31, 2019 , to 0.87% atJune 30, 2020 , related to the large impaired relationship added in the first quarter, for which the Company believes it is sufficiently collateralized.
As of
losses was appropriate in light of the risk inherent in the loan portfolio.
Other real estate owned decreased$135,000 during the first six months of 2020. The Company sold three pieces of foreclosed property totaling$130,000 , realizing a gain of$53,000 . The Company had$21,000 in write-downs for the period endedJune 30, 2020 . There were no loans foreclosed on during the first six months of 2020. Troubled debt restructured loans atJune 30, 2020 totaled$4.8 million compared to$3.9 million atDecember 31, 2019 and are included in impaired loans. The increase is related to one relationship of$650,000 added. AtJune 30, 2020 , there were two troubled debt restructured loans in non-accrual status, which had a balance of$69,000 .
As discussed in Note 8 of our Notes to Consolidated Financial Statements, the
CARES Act allows for loan modifications related to COVID-19 impacts to be
excluded from TDR status. As of
outstanding loan portfolio modifications of 179 COVID-19 impacted loans for
The following table shows the comparison of nonperforming assets atJune 30, 2020 toDecember 31, 2019 : Nonperforming Assets (dollars in thousands) June 30, 2020 December 31, 2019 Nonperforming assets: Loans past due 90 days or more $ - $ - Non-accrual loans 3,939 2,922 Other real estate owned 359 494 Total nonperforming assets $ 4,298 $ 3,416 Allowance for loans losses $ 3,426 $ 1,981 Nonperforming loans to total loans 0.87 % 0.82 % Allowance for loan losses to total loans 0.75 % 0.55 % Nonperforming assets to total assets 0.57 % 0.52 % Allowance for loan losses to nonperforming loans 86.98 % 67.80 %
Liquidity and Capital Resources
The objective of the Company's liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature and to fund new loans and investments as opportunities arise. The Company's primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank's established federal funds lines with correspondent banks aggregating$28 million atJune 30, 2020 , with available credit of$28 million ; established borrowing relationships with the -35- --------------------------------------------------------------------------------Federal Home Loan Bank , with available credit of$54.0 million ; access to borrowings from theFederal Reserve Bank discount window, with available credit of$24.5 million and the issuance of commercial paper. The Company also secured a$3.0 million line of credit with TIBThe Independent BankersBank, N.A. , during the first quarter of 2020. The line is secured with 100% of the outstanding common shares of the Company's subsidiary bank. As ofJune 30, 2020 , we had$2.0 million that had not been extended and remained available for use on the line of credit. The Company has also previously secured long-term debt from other sources. Total outstanding debt from these sources included$10.0 million of junior subordinated debt at bothJune 30, 2020 andDecember 31, 2019 . 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 Basel III rules began to phase in for the Company and its subsidiary bank onJanuary 1, 2015 , with full compliance of all the rules' requirements effective onJanuary 1, 2019 . As ofJune 30, 2020 , the Company's subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules. The Company's subsidiary bank has a net total of$10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of$10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. AtJune 30, 2020 , the Company had$10.0 million in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include transactions, agreements or other contractual arrangements to which an unconsolidated entity of the Company is a party and pursuant to which the Company has obligations, including an obligation to provide guarantees on behalf of an unconsolidated entity, or retains an interest in assets transferred to an unconsolidated entity. We currently have no off-balance sheet arrangements of this kind. Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities throughJune 30, 2020 and have no current plans to do so.
Contractual Obligations
The timing and amount of our contractual obligations has not changed materially since our 2019 Annual Report to Shareholders, which is filed as Exhibit 13 to our 2019 Annual Report on Form 10-K.
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