8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 16, 2022

UWHARRIE CAPITAL CORP

(Exact name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: 704-983-6181

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

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. ☐

Item 2.02 Results of Operations and Financial Condition

On November 16, 2022, Uwharrie Capital Corp (the "Registrant") released a quarterly report to its shareholders that included a letter to the shareholders from President and CEO Roger L. Dick and unaudited financial information for the period ended September 30, 2022.

A copy of this report is attached hereto as Exhibit 99.1 and incorporated by reference herein.

This Current Report on Form 8-K (including information included or incorporated by reference herein) may contain, among other things, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, (i) statements regarding certain of the Registrant’s goals and expectations with respect to earnings, income per share, revenue, expenses and the growth rate in such items, as well as other measures of economic performance, including statements relating to estimates of credit quality trends, and (ii) statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook” or similar expressions. These statements are based upon the current belief and expectations of the Registrant’s management and are subject to significant risks and uncertainties that are subject to change based on various factors (many of which are beyond the Registrant’s control).

Item 9.01 Financial Statements and Exhibits

(c) Exhibits

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.

uwhr-ex991_6.htm

Exhibit 99.1

November 16, 2022

Dear Shareholder:

Your Company has grown to $1.04 billion in total assets as of September 30, 2022, an increase of $118 million from the same period in 2021.  We have experienced continued deposit growth due to monetary policy and government intervention in response to COVID.  While growth in average balances of existing customer households contributed to 62% of our deposit growth, a significant 38% of our growth year-over-year came from the addition of new customer relationships.

Loan growth has been strong during 2022 at 16%, excluding Paycheck Protection Program (PPP) loans issued as a part of the Cares Act.  This growth will support margins in the long-term and replace the one-time margin income recognized in 2021 from the PPP loan forgiveness.

The rapid increase in interest rates we are currently experiencing is a mixed blessing.  While higher rates on floating rate assets and new loans are contributing to an improvement in our net interest margin, the higher interest rates have had a negative effect on our home mortgage volume and the valuation of our securities portfolio.

According to the Federal Deposit Insurance Corporation, in the second quarter of 2022, banks reported $450 billion of unrealized losses on “Available for Sale” securities.  Bank accounting allows for classifying securities as either “Held to Maturity” (HTM) or “Available for Sale” (AFS.)  Securities classified as HTM are recorded and reported at book value on the balance sheet and their market value is not adjusted.  Securities classified as AFS are recorded at current market value.  As interest rates rise, the values of most securities decline.  However, only the securities classified as AFS are marked down on the balance sheet to reflect their decline in value resulting from a rise in interest rates.  Since the Bank has not sold these securities, their net decline in value is reflected in a balance sheet capital account called “Accumulated Other Comprehensive Income” (AOCI.) The AOCI adjustments for the decline in value of the securities portfolio have a negative impact on tangible book value.  Due to the sharply rising interest rate environment, the AOCI reflected in your Shareholders’ Equity has declined to a negative $34.1 million as of September 30, 2022.

If the AFS bonds are held to maturity, this unrealized loss would move to zero upon maturity. Because of this unrealized loss, our September 30, 2022 book value is reported at $3.07, as compared to $7.02 on September 30, 2021.  If we had chosen to classify all of our securities as HTM, there would be no unrealized loss recorded, and the book value for the current period would be reported at $7.87.

A number of banks have chosen to place a large portion of their bonds in a HTM classification which allows them to avoid this negative adjustment to tangible book value.  However, doing so does not allow them to potentially sell these bonds and benefit from harvesting tax losses and investing in today’s higher yields for the efficient management of income taxes and greater value for shareholders.

While attempting to explain how the accounting works, I realize all of this may be a bit “in the weeds” but this unprecedented rise in interest rates is having a significant impact on reported book value of all banks, as it is your Bank.  It is important to note that AOCI is excluded from the calculation of our regulatory and risk-based capital ratios.  As of September 30, 2022, the Bank had total Risk Based Capital of 15.64%, which compares favorably to

a well-capitalized bank standard of 10%, and our FDIC peer at 15.45%.  Uwharrie Bank continues to exceed minimum capital standards and remains well-capitalized under the applicable rules.

Net income for the first nine months of 2022 was $5.3 million, as compared to $8.9 million for the same nine- month period in 2021.  This equates to $4.9 million in net income available to common shareholders, or $0.69 per share, compared to $8.4 million in net income available to common shareholders, or $1.14 per share, that we reported in 2021 for the same period.  The key driver of the reduction in earnings year-over-year is directly attributable to the reduction in income from mortgage banking as a result of the drastically increasing rate environment, causing a significant slow-down in mortgage originations and virtually no re-finance incentive for homeowners.

A positive and material contribution to our third quarter earnings comes from a $1.407 million recovery from our loan loss reserve.  Our reserve model reflects lower probability of expected losses due to the indicators for North Carolina, specifically the Charlotte region, and the credit quality of individual loans.  While this appears contrary to the logic of an economy with increasing uncertainty, a detailed review of our asset quality in addition to the factors used in our reserve model call for this recovery.

The Bank is to convert to a new loss methodology in 2023 referred to as Current Expected Credit Losses (CECL) standard.  CECL replaces the current Allowance for Loan and Lease Losses (ALLL) accounting methodology. The CECL standard focuses on estimation of expected losses over the life of the loans, while the current standard relies on incurred losses based primarily on historical indicators of default.  It is expected that our conversion to CECL and the life of loan expected loss model will require different reserve levels.

It has been a challenging but successful three quarters in 2022.  We continue to grow and accomplish our strategic objectives.  Accordingly, with the progress made, your Board of Directors has declared a stock dividend of 2.5%.  All shareholders of record on November 8, 2022, will receive the dividend on November 22, 2022.  The stock dividend will be paid electronically via book-entry (no stock certificates will be issued.)  Consistent with prior years, we choose to pay a stock dividend as opposed to cash to provide our shareholders with options to suit their specific financial needs.  Shareholders in peak earning years may choose to hold the dividend shares, which defers income, and paying taxes in later years could be at a lower capital gains rate.  For our shareholders desiring current income, these new shares can be sold for cash.  The stock dividend gives you the flexibility of when to recognize the income and address the tax considerations based on your individual needs.

In closing, as we experience fall of the year and crisp morning air, there is a renewed sense of thanksgiving, as we prepare for time with family and friends.  In spite of all the uncertainty, we reflect and count our blessings…“what has been” and “what is to come.”  We appreciate you.

Best wishes to you and your family for a blessed holiday season.

Sincerely,

UWHARRIE CAPITAL CORP

This Report may contain, among other things, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, (i) statements regarding certain of the Company's goals and expectations with respect to earnings, income per share, revenue, expenses and the growth rate in such items, as well as other measures of economic performance, including statements relating to estimates of credit quality trends, and (ii) statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook,” or similar expressions. These statements are based upon the current belief and expectations of the Company‘s management and are subject to significant risks and uncertainties that are subject to change based on various factors (many of which are beyond the Company’s control).

All values are in US Dollars.