Equibles

10-Q

UWHARRIE CAPITAL CORP (UWHR)

10-Q 2021-11-02 For: 2021-09-30
View Original
Added on April 06, 2026

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, 2021

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<br><br><br>Incorporation or Organization) (I.R.S. Employer<br><br><br>Identification No.)
132 NORTH FIRST STREET<br><br><br>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<br><br><br>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: 6,945,231 shares of common stock outstanding as of October 28, 2021.

Table of Contents

Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 7
Notes to Consolidated Financial Statements 8
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
Item 1 - Legal Proceedings 39
Item 1A - Risk Factors 40
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3 - Defaults Upon Senior Securities 40
Item 4 - Mine Safety Disclosures 40
Item 5 - Other Information 40
Item 6 - Exhibits 41
Signatures 42

-2-

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financial Information

Item 1. Financial Statements.
December 31, 2020*
--- --- --- --- --- ---
ASSETS
Cash and due from banks 4,015 $ 6,301
Interest-earning deposits with banks 112,059 82,567
Cash and cash equivalents 116,074 88,868
Securities available for sale, at fair value 291,049 191,513
Securities held to maturity, at amortized cost (fair value 29,687 and 29,600, respectively) 28,588 28,207
Equity security, at fair value 409 1,352
Loans held for sale 9,737 6,959
Loans:
Loans held for investment 432,335 467,741
Less allowance for loan losses (3,670 ) (4,402 )
Net loans held for investment 428,665 463,339
Premises and equipment, net 16,149 16,982
Interest receivable 2,679 2,524
Restricted stock 921 1,166
Bank-owned life insurance 9,033 8,936
Prepaid assets 879 1,146
Loan servicing assets 5,125 3,957
Mortgage banking derivatives 1,196 2,073
Other assets 10,482 10,748
Total assets 920,986 $ 827,770
LIABILITIES
Deposits:
Demand noninterest-bearing 243,686 $ 205,788
Interest checking and money market accounts 404,484 381,502
Savings deposits 93,290 74,792
Time deposits, 250,000 and over 24,363 28,825
Other time deposits 47,501 52,289
Total deposits 813,324 743,196
Short-term borrowed funds 1,130 710
Long-term debt 29,511 10,992
Interest payable 69 21
Mortgage banking derivatives — 388
Other liabilities 14,791 13,226
Total liabilities 858,825 768,533
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<br>   outstanding 6,949,634 and 7,052,143, at September 30, 2021 and December 31, 2020, respectively 8,687 8,815
Common stock dividend distributable 261 —
Additional paid-in capital 13,550 12,607
Undivided profits 29,558 23,000
Accumulated other comprehensive income (loss) (550 ) 4,160
Total Uwharrie Capital Corp shareholders’ equity 51,506 48,582
Noncontrolling interest 10,655 10,655
Total shareholders’ equity 62,161 59,237
Total liabilities and shareholders’ equity 920,986 $ 827,770

All values are in US Dollars.

(*) Derived from audited consolidated financial statements

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

Nine Months Ended September 30,
2020 2021 2020
Interest Income
Loans, including fees 6,242 $ 5,190 $ 17,639 $ 14,774
Investment securities
U.S. Treasury 32 8 32 74
U.S. Government agencies and corporations 406 427 1,258 1,153
State and political subdivisions, non-taxable 473 215 957 509
State and political subdivisions, taxable 138 276 793 545
Equity Securities 5 34 15 34
Interest-earning deposits with banks and federal funds sold 53 26 96 616
Total interest income 7,349 6,176 20,790 17,705
Interest Expense
Interest checking and money market accounts 105 140 292 618
Savings deposits 18 14 48 49
Time deposits, 250,000 and over 17 35 63 335
Other time deposits 36 123 159 410
Short-term borrowed funds 1 — 3 2
Long-term debt 190 142 458 417
Total interest expense 367 454 1,023 1,831
Net interest income 6,982 5,722 19,767 15,874
Provision for (recovery of) loan losses (1,057 ) 1,066 (1,232 ) 2,465
Net interest income after provision for (recovery of) loan losses 8,039 4,656 20,999 13,409
Noninterest Income
Service charges on deposit accounts 253 241 735 763
Interchange and card transaction fees, net 261 266 819 640
Other service fees and commissions 842 588 2,272 1,911
Gain on sale of securities — 19 991 77
Realized/unrealized gain (loss) on equity securities (2 ) 101 (14 ) 434
Income from mortgage banking 2,323 3,961 9,498 8,727
Supplemental executive retirement plan gain (loss) 786 115 1,125 (11 )
Other income (expense) 97 255 415 439
Total noninterest income 4,560 5,546 15,841 12,980
Noninterest Expense
Salaries and employee benefits 5,833 5,254 16,455 14,708
Net occupancy expense 433 430 1,319 1,261
Equipment expense 192 202 529 564
Data processing costs 170 171 500 491
Loan costs 192 155 689 409
Professional fees and services 239 313 707 716
Marketing and donations 215 294 1,036 705
Electronic banking expense 101 120 285 346
Software amortization and maintenance 335 352 1,058 916
FDIC insurance 69 108 177 216
Supplemental executive retirement plan gain (loss) 786 115 1,125 (11 )
Other noninterest expense 618 488 1,700 1,424
Total noninterest expense 9,183 8,002 25,580 21,745
Income before income taxes 3,416 2,200 11,260 4,644
Income taxes 732 618 2,389 1,132
Net income 2,684 $ 1,582 $ 8,871 $ 3,512
Consolidated net income 2,684 $ 1,582 $ 8,871 $ 3,512
Less: net income attributable to noncontrolling interest (142 ) (142 ) (422 ) (424 )
Net income attributable to Uwharrie Capital Corp and common shareholders 2,542 1,440 8,449 3,088
Net income per common share
Basic 0.35 $ 0.20 $ 1.17 $ 0.42
Diluted 0.35 $ 0.20 $ 1.17 $ 0.42
Weighted average shares outstanding
Basic 7,168,405 7,319,100 7,218,109 7,360,295
Diluted 7,168,405 7,319,100 7,218,109 7,360,295

All values are in US Dollars.

See accompanying notes

=

-4-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Net income $ 2,684 $ 1,582 $ 8,871 $ 3,512
Unrealized gain (loss) on available for sale securities (2,354 ) 333 (5,126 ) 4,080
Related tax effect 535 (78 ) 1,197 (938 )
Reclassification of gain recognized in net income — (19 ) (991 ) (77 )
Related tax effect 6 6 210 17
Total other comprehensive income (loss) (1,813 ) 242 (4,710 ) 3,082
Comprehensive income 871 1,824 4,161 6,594
Less: Comprehensive income attributable to noncontrolling interest (142 ) (142 ) (422 ) (424 )
Comprehensive income attributable to Uwharrie Capital Corp $ 729 $ 1,682 $ 3,739 $ 6,170

See accompanying notes

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

Number of<br><br><br>Common<br><br><br>Shares<br><br><br>Issued Common<br><br><br>Stock Common Stock Dividend Distributable Additional<br><br><br>Paid-in<br><br><br>Capital Undivided<br><br><br>Profits Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>Income (Loss) Non<br><br><br>Controlling<br><br><br>Interest Total
(dollars in thousands, except share data)
Balance, June 30, 2020 6,970,141 $ 8,713 $ — $ 12,250 $ 17,874 $ 3,163 $ 10,655 $ 52,655
Net Income — — — — 1,440 — 142 1,582
2% stock dividend declaration — — 174 540 (714 ) — — —
Repurchase and retirement of common stock (8,911 ) (11 ) — (34 ) — — — (45 )
Other comprehensive income — — — — — 242 — 242
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (105 ) (105 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (37 ) (37 )
Balance, September 30, 2020 6,961,230 $ 8,702 $ 174 $ 12,756 $ 18,600 $ 3,405 $ 10,655 $ 54,292
Balance, June 30, 2021 6,964,242 $ 8,705 $ — $ 12,030 $ 28,907 $ 1,263 $ 10,655 $ 61,560
Net Income — — — — 2,542 — 142 2,684
3% stock dividend declaration — — 261 1,630 (1,891 ) — — —
Repurchase and retirement of common stock (14,608 ) (18 ) — (110 ) — — — (128 )
Other comprehensive loss — — — — — (1,813 ) — (1,813 )
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (105 ) (105 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (37 ) (37 )
Balance, September 30, 2021 6,949,634 $ 8,687 $ 261 $ 13,550 $ 29,558 $ (550 ) $ 10,655 $ 62,161
Number of<br><br><br>Common<br><br><br>Shares<br><br><br>Issued Common<br><br><br>Stock Common Stock Dividend Distributable Additional<br><br><br>Paid-in<br><br><br>Capital Undivided<br><br><br>Profits Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>Income (Loss) Non<br><br><br>Controlling<br><br><br>Interest Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands, except share data)
Balance, December 31, 2019 7,095,920 $ 8,870 $ — $ 12,784 $ 16,226 $ 323 $ 10,655 $ 48,858
Net Income — — — — 3,088 — 424 3,512
2% stock dividend declaration — — 174 540 (714 ) — — —
Repurchase and retirement of common stock (134,690 ) (168 ) — (568 ) — — — (736 )
Other comprehensive income — — — — — 3,082 — 3,082
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (313 ) (313 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (111 ) (111 )
Balance, September 30, 2020 6,961,230 $ 8,702 $ 174 $ 12,756 $ 18,600 $ 3,405 $ 10,655 $ 54,292
Balance, December 31, 2020 7,052,143 $ 8,815 $ — $ 12,607 $ 23,000 $ 4,160 $ 10,655 $ 59,237
Net Income — — — — 8,449 — 422 8,871
3% stock dividend declaration — — 261 1,630 (1,891 ) — — —
Repurchase and retirement of common stock (102,509 ) (128 ) — (687 ) — — — (815 )
Other comprehensive loss — — — — — (4,710 ) — (4,710 )
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (311 ) (311 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (111 ) (111 )
Balance, September 30, 2021 6,949,634 $ 8,687 $ 261 $ 13,550 $ 29,558 $ (550 ) $ 10,655 $ 62,161

See accompanying notes

-6-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,
2021 2020
(dollars in thousands)
Cash flows from operating activities
Net income $ 8,871 $ 3,512
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization 845 857
Right of use asset amortization 252 246
Provision for (recovery of) loan losses (1,232 ) 2,465
Gain on sale of securities available for sale (991 ) (77 )
Gain on sale of mortgage loans 7,345 6,032
(Gain) loss on sale of premises and equipment (41 ) 16
Gain on sale of OREO — (53 )
OREO write-downs — 21
Realized/unrealized (gain) loss on equity securities 14 (434 )
Net amortization of premium on investment securities available for sale 963 387
Net amortization of premium on investment securities held to maturity 116 108
Amortization of loan servicing rights 1,153 2,222
Originations and purchases of mortgage loans for sale (273,575 ) (232,471 )
Proceeds from sales of mortgage loans for sale 263,452 219,360
Mortgage banking derivatives 489 (252 )
Loan servicing assets (2,322 ) (2,248 )
Accrued interest receivable (156 ) (781 )
Prepaid assets 267 (286 )
Cash surrender value of life insurance (97 ) (105 )
Miscellaneous other assets 881 (463 )
Accrued interest payable 48 (28 )
Miscellaneous other liabilities 1,565 887
Net cash provided (used) by operating activities 7,847 (1,085 )
Cash flows from investing activities
Proceeds from sales of investment securities available for sale 49,280 13,155
Proceeds from sale of equity securities 929 —
Proceeds from maturities, calls and paydowns of securities available for sale 15,363 7,593
Proceeds from maturities, calls and paydowns of securities held to maturity 2,253 5,656
Purchase of investment securities available for sale (170,268 ) (107,113 )
Purchase of investment securities held to maturity (2,750 ) (18,580 )
Purchase of equity securities — (901 )
Purchase of investments in other assets (326 ) (1,100 )
Proceeds from sales of investments in other assets 1,120 —
Net change in restricted stock 245 (22 )
Net (increase) decrease in loans 35,906 (109,728 )
Purchase of premises and equipment (559 ) (449 )
Proceeds from sale of premises and equipment 336 —
Proceeds from sale of OREO — 167
Net cash used by investing activities (68,471 ) (211,322 )
Cash flows from financing activities
Net increase in deposit accounts 70,128 127,809
Net increase in federal funds purchased and other short-term borrowings 420 9
Proceeds from long-term borrowings 20,000 1,000
Debt issuance costs (481 ) —
Repayment of long-term borrowings (1,000 ) —
Repurchase of common stock, net (815 ) (736 )
Dividends paid on preferred stock (noncontrolling interest) (422 ) (424 )
Net cash provided by financing activities 87,830 127,658
Increase (decrease) in cash and cash equivalents 27,206 (84,749 )
Cash and cash equivalents, beginning of period 88,868 155,198
Cash and cash equivalents, end of period $ 116,074 $ 70,449
Supplemental disclosures of cash flow information
Interest paid $ 975 $ 1,749
Income taxes paid 1,727 1,327
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax $ (4,710 ) $ 3,082
Company financed OREO — 90

See accompanying notes

-7-

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 continues to evaluate the impact of COVID-19, the disease caused by the novel Coronavirus, beyond the current impacts as of September 30, 2021, which are discussed throughout the accompanying notes of this report. 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 2020 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 5, 2021. 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 loan losses.

Accounting Changes, Reclassifications and Restatements

Certain amounts in the 2020 financial statements have been reclassified to conform to the 2021 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

Note 2 – Comprehensive Income (Loss)

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale.

The following table presents the changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020:

For the Nine Months Ended September 30,
2020 2021 2020
Beginning balance 1,263 $ 3,163 $ 4,160 $ 323
Other comprehensive income (loss) before reclassifications,<br>   net of 536, (78), 1,197 and (938) tax effect, respectively (1,819 ) 255 (3,929 ) 3,142
Amounts reclassified from accumulated other comprehensive <br>   income, net of 6, 6, 210 and 17 tax effect, respectively 6 (13 ) (781 ) (60 )
Net current-period other comprehensive income (loss) (1,813 ) 242 (4,710 ) 3,082
Ending balance (550 ) $ 3,405 $ (550 ) $ 3,405

All values are in US Dollars.

-8-

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 19, 2021, the Company’s Board of Directors declared a 3% stock dividend payable on November 23, 2021 to shareholders of record on November 9, 2021. All information presented in the accompanying interim 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 2020 periods have also been adjusted for the 2% stock dividend declared on October 20, 2020.

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, 2021 or December 31, 2020.

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 7,168,405 for the three-month period ended September 30, 2021 compared to 7,319,100 for the three-month period ended September 30, 2020. For the nine-month period ended September 30, 2021, the weighted average common shares outstanding was 7,218,109 compared to 7,360,295 for the nine-month period ended September 30, 2020.

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, 2021 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(dollars in thousands)
Securities available for sale
U.S. Treasury $ 16,671 $ — $ 248 $ 16,423
U.S. Government agencies 39,776 228 437 39,567
GSE - Mortgage-backed securities and CMO’s 101,639 328 982 100,985
Asset-backed securities 36,349 1,214 1 37,562
State and political subdivisions 87,407 781 1,757 86,431
Corporate bonds 9,921 191 31 10,081
Total securities available for sale $ 291,763 $ 2,742 $ 3,456 $ 291,049
September 30, 2021 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities held to maturity
U.S. Government agencies $ 175 $ 4 $ — $ 179
State and political subdivisions 15,663 935 — 16,598
Corporate bonds 12,750 198 38 12,910
Total securities held to maturity $ 28,588 $ 1,137 $ 38 $ 29,687

-9-

December 31, 2020 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(dollars in thousands)
Securities available for sale
U.S. Government agencies $ 36,804 $ 611 $ 26 $ 37,389
GSE - Mortgage-backed securities and CMO’s 39,720 1,844 68 41,496
Asset-backed securities 38,536 748 3 39,281
State and political subdivisions 67,148 2,107 91 69,164
Corporate bonds 3,902 281 — 4,183
Total securities available for sale $ 186,110 $ 5,591 $ 188 $ 191,513
December 31, 2020 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities held to maturity
U.S. Government agencies $ 459 $ 11 $ — $ 470
State and political subdivisions 17,748 1,382 — 19,130
Corporate bonds 10,000 — — 10,000
Total securities held to maturity $ 28,207 $ 1,393 $ — $ 29,600

At September 30, 2021 and December 31, 2020, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 for both periods, and Federal Home Loan Bank (FHLB) stock reported at a cost of $411,000 and $657,000 at September 30, 2021 and December 31, 2020, 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 is 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, 2021.

Results from sales of securities available for sale for the three- and nine-month periods ended September 30, 2021 and September 30, 2020 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Gross proceeds from sales $ — $ 5,569 $ 49,280 $ 13,155
Realized gains from sales $ — $ 22 $ 1,505 $ 80
Realized losses from sales — 3 514 3
Net realized gains $ — $ 19 $ 991 $ 77

At September 30, 2021 and December 31, 2020, securities available for sale with a carrying amount of $113.3 million and $82.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

-10-

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020. We believe these unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments. At September 30, 2021, the unrealized losses on available for sale securities less than twelve months related to three U.S. Treasury bonds, fourteen government agency bonds, nineteen government-sponsored enterprise (“GSE”) mortgage-backed securities, one asset-backed security, forty-three state and political subdivision bonds and three corporate bonds. There were six corporate held to maturity bonds that had been in a loss position less than twelve months at September 30, 2021. At December 31, 2020, the unrealized losses on available for sale securities less than twelve months related to four government agency bonds, three GSE mortgage-backed securities, two asset-backed securities and ten state and political subdivision bonds. At September 30, 2021, the Company had two government agency bonds, one GSE mortgage-backed security and one state and political subdivision bond that had been in a loss position for twelve months or more.

Less than 12 Months 12 Months or More Total
September 30, 2021 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury $ 16,423 $ 248 $ — $ — $ 16,423 $ 248
U.S. Government agencies 21,089 408 2,490 29 23,579 437
GSE-Mortgage-backed securities and CMO’s 65,906 903 4,751 79 70,657 982
Asset-backed securities 697 1 — — 697 1
State and political subdivisions 67,997 1,747 955 10 68,952 1,757
Corporate bonds 5,969 31 — — 5,969 31
Total securities available for sale $ 178,081 $ 3,338 $ 8,196 $ 118 $ 186,277 $ 3,456
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
September 30, 2021 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities held to maturity temporary impairment
Corporate bonds 3,962 38 — — 3,962 38
Total securities held to maturity $ 3,962 $ 38 $ — $ — $ 3,962 $ 38
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2020 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities available for sale temporary impairment
U.S. Government agencies $ 5,061 $ 26 $ — $ — $ 5,061 $ 26
GSE-Mortgage-backed securities and CMO’s 10,263 68 — — 10,263 68
Asset-backed securities 2,686 3 — — 2,686 3
State and political subdivisions 11,286 91 — — 11,286 91
Total securities available for sale $ 29,296 $ 188 $ — $ — $ 29,296 $ 188
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2020 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities held to maturity temporary impairment
U.S. Government agencies $ — $ — $ — $ — $ — $ —
State and political subdivisions — — — — — —
Corporate bonds — — — — — —
Total securities held to maturity $ — $ — $ — $ — $ — $ —

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment, 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 and the intent and the ability of the Company to hold the investment until the loss position is recovered.

-11-

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, 2021, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following tables show contractual maturities of the investment portfolio as of September 30, 2021:

September 30, 2021
Amortized<br><br><br>Cost Estimated<br><br><br>Fair Value Book<br><br><br>Yield
(dollars in thousands)
Securities available for sale
U.S. Treasury
Due after five but within ten years 16,671 16,423 1.12 %
16,671 16,423 1.12 %
U.S. Government agencies
Due within twelve months 4,003 4,071 1.80 %
Due after one but within five years 2,800 2,871 1.93 %
Due after five but within ten years 20,879 20,554 0.81 %
Due after ten years 12,094 12,071 0.74 %
39,776 39,567 0.97 %
Mortgage-backed securities
Due after one but within five years 5,714 5,766 3.34 %
Due after five but within ten years 34,863 34,549 1.07 %
Due after ten years 61,062 60,670 1.02 %
101,639 100,985 1.17 %
Asset-backed securities
Due after ten years 36,349 37,562 1.20 %
36,349 37,562 1.20 %
State and political subdivisions
Due within twelve months 810 810 2.45 %
Due after one but within five years 1,862 1,912 2.73 %
Due after five but within ten years 1,486 1,476 1.84 %
Due after ten years 83,249 82,233 1.81 %
87,407 86,431 1.84 %
Corporate bonds
Due within twelve months 1,998 2,028 2.98 %
Due after one but within five years 5,923 6,065 1.68 %
Due after five but within ten years 2,000 1,988 2.00 %
9,921 10,081 2.00 %
Total securities available for sale
Due within twelve months 6,811 6,909 2.22 %
Due after one but within five years 16,299 16,614 2.42 %
Due after five but within ten years 75,899 74,990 1.05 %
Due after ten years 192,754 192,536 1.38 %
$ 291,763 $ 291,049 1.37 %

-12-

September 30, 2021
Amortized<br><br><br>Cost Estimated<br><br><br>Fair Value Book<br><br><br>Yield
(dollars in thousands)
Securities held to maturity
U. S. Government agencies
Due after one but within five years $ 175 $ 179 2.75 %
175 179 2.75 %
State and political subdivisions
Due within twelve months 306 308 1.70 %
Due after one but within five years 1,962 2,025 2.23 %
Due after ten years 13,395 14,265 2.85 %
15,663 16,598 2.75 %
Corporate Bonds
Due after five but within ten years 12,750 12,910 4.73 %
12,750 12,910 1.73 %
Total securities held for maturity
Due within twelve months 306 308 1.70 %
Due after one but within five years 2,137 2,204 2.28 %
Due after five but within ten years 12,750 12,910 4.73 %
Due after ten years 13,395 14,265 2.85 %
$ 28,588 $ 29,687 3.63 %

The portion of unrealized gains and losses for the three and nine months ended September 30, 2021 and 2020 related to equity securities still held at the reporting date is calculated as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Gross proceeds from sales $ — $ — $ 929 $ —
Net gains (losses) recognized during the period on equity securities $ (2 ) $ 101 $ (14 ) $ 434
Less: Net gains (losses) recognized from equity securities sold during the period — — (18 ) —
Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date $ (2 ) $ 101 $ 4 $ 434

-13-

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2021 and December 31, 2020 are as follows:

September 30, 2021 December 31, 2020
(dollars in thousands)
Commercial
Commercial $ 70,042 $ 64,334
SBA Paycheck Protection Program (PPP) 27,347 76,398
Real estate - commercial 149,586 147,229
Other real estate construction loans 31,963 32,920
Other loans 5,394 3,098
Noncommercial
Real estate 1-4 family construction 5,700 7,709
Real estate - residential 81,584 75,000
Home equity 52,440 51,615
Consumer loans 9,095 11,073
433,151 469,376
Less:
Allowance for loan losses (3,670 ) (4,402 )
Deferred loan fees net (816 ) (1,635 )
Loans held for investment, net $ 428,665 $ 463,339

The Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”), was created as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The Company participated in assisting its customers with applications for funds through the program.  PPP loans have a two-year term or, if approved after June 5, 2020, a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2021, the Company had funded 1,202 PPP loans representing $81.0 million. Of the loans funded, 1,123 loans totaling $79.2 million had been paid off or forgiven by the SBA as of September 30, 2021. Remaining deferred loan fees of $39,000 and remaining deferred loan costs of $17,000 were attributable to the first round of PPP loans at September 30, 2021. The Consolidated Appropriations Act, 2021, or CAA, established another round of PPP loan funding for certain eligible borrowers, and the Company had funded 879 PPP loans totaling $46.4 million under this additional round as of September 30, 2021. Of the loans funded during the second round of PPP funding, 421 loans totaling $20.9 million had been paid off or forgiven by the SBA as of September 30, 2021. Remaining deferred loan fees of $1.4 million and remaining deferred loan costs of $161,000 were attributable to the second round of PPP loans at September 30, 2021. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision expense charged to earnings.

Note 7 – Allowance for Loan Losses

The following tables show the change in the allowance for loan losses by loan segment for the three and nine months ended September 30, 2021 and 2020, respectively:

Commercial Three Months Ended September 30, Nine Months Ended<br><br><br>September 30,
2021 2020 2021 2020
(dollars in thousands)
Balance, beginning of period $ 2,521 $ 2,111 $ 2,753 $ 1,087
Provision for (recovery of) loan losses (831 ) 650 (965 ) 1,652
Charge-offs — — (118 ) (38 )
Recoveries 538 5 558 65
Net recoveries 538 5 440 27
Balance at end of period $ 2,228 $ 2,766 $ 2,228 $ 2,766

-14-

Non-Commercial Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Balance, beginning of period $ 1,653 $ 1,315 $ 1,649 $ 894
Provision for (recovery of) loan losses (226 ) 416 (267 ) 813
Charge-offs (13 ) (17 ) (41 ) (41 )
Recoveries 28 14 101 62
Net (charge-offs) recoveries 15 (3 ) 60 21
Balance at end of period $ 1,442 $ 1,728 $ 1,442 $ 1,728
Total Three Months Ended September 30, Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2021 2020 2021 2020
(dollars in thousands)
Balance, beginning of period $ 4,174 $ 3,426 $ 4,402 $ 1,981
Provision for (recovery of) loan losses (1,057 ) 1,066 (1,232 ) 2,465
Charge-offs (13 ) (17 ) (159 ) (79 )
Recoveries 566 19 659 127
Net recoveries 553 2 500 48
Balance at end of period $ 3,670 $ 4,494 $ 3,670 $ 4,494

The following tables show period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2021 and December 31, 2020:

September 30, 2021
Individually Evaluated Collectively Evaluated Total
Reserve Loans Reserve Loans Reserve Loans
(dollars in thousands)
Commercial $ 91 $ 4,426 $ 2,137 $ 278,715 $ 2,228 $ 283,141
Non-Commercial 117 2,872 1,325 146,322 1,442 149,194
Total $ 208 $ 7,298 $ 3,462 $ 425,037 $ 3,670 $ 432,335
December 31, 2020
--- --- --- --- --- --- --- --- --- --- --- --- ---
Individually Evaluated Collectively Evaluated Total
Reserve Loans Reserve Loans Reserve Loans
(dollars in thousands)
Commercial $ 53 $ 5,237 $ 2,700 $ 317,094 $ 2,753 $ 322,331
Non-Commercial 94 2,917 1,555 142,493 1,649 145,410
Total $ 147 $ 8,154 $ 4,255 $ 459,587 $ 4,402 $ 467,741

-15-

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, 2021
Loans<br><br><br>30-89 Days<br><br><br>Past Due Loans<br><br><br>90 Days<br><br><br>or More<br><br><br>Past due<br><br><br>and Non -<br><br><br>Accrual Total Past<br><br><br>Due Loans Current<br><br><br>Loans Total<br><br><br>Loans Accruing<br><br><br>Loans 90 or<br><br><br>More Days<br><br><br>Past Due
(dollars in thousands)
Commercial $ — $ 310 $ 310 $ 69,732 $ 70,042 $ —
SBA Paycheck Protection Program (PPP) — — — 26,042 26,042 —
Real estate - commercial — 2,125 2,125 147,575 149,700 —
Other real estate construction — — — 31,963 31,963 —
Real estate 1-4 family construction — — — 5,700 5,700 —
Real estate - residential — 555 555 81,404 81,959 —
Home equity 74 233 307 52,133 52,440 —
Consumer loans 28 — 28 9,067 9,095 —
Other loans — — — 5,394 5,394 —
Total $ 102 $ 3,223 $ 3,325 $ 429,010 $ 432,335 $ —
December 31, 2020
--- --- --- --- --- --- --- --- --- --- --- --- ---
Loans<br><br><br>30-89 Days<br><br><br>Past Due Loans<br><br><br>90 Days<br><br><br>or More<br><br><br>Past due<br><br><br>and Non -<br><br><br>Accrual Total Past<br><br><br>Due Loans Current<br><br><br>Loans Total<br><br><br>Loans Accruing<br><br><br>Loans 90 or<br><br><br>More Days<br><br><br>Past Due
(dollars in thousands)
Commercial $ — $ — $ — $ 64,334 $ 64,334 $ —
SBA Paycheck Protection Program (PPP) — — — 74,750 74,750 —
Real estate - commercial — 2,076 2,076 145,153 147,229 —
Other real estate construction 52 1,039 1,091 31,829 32,920 —
Real estate 1-4 family construction — — — 7,709 7,709 —
Real estate - residential 299 595 894 74,119 75,013 —
Home equity — 48 48 51,567 51,615 —
Consumer loan 46 — 46 11,027 11,073 —
Other loans — — — 3,098 3,098 —
Total $ 397 $ 3,758 $ 4,155 $ 463,586 $ 467,741 $ —

Once a loan becomes 90 days past due, the loan is automatically transferred to a non-accrual 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, 2021. At December 31, 2020, the Company had $0 in foreclosed residential real estate and $51,000 of residential real estate in process of foreclosure.

-16-

The composition of non-accrual loans by class as of September 30, 2021 and December 31, 2020 was as follows:

September 30, 2021 December 31, 2020
(dollars in thousands)
Commercial $ 310 $ —
SBA Paycheck Protection Program (PPP) — —
Real estate - commercial 2,125 2,076
Other real estate construction — 1,039
Real estate 1 – 4 family construction — —
Real estate – residential 555 595
Home equity 233 48
Consumer loans — —
Other loans — —
$ 3,223 $ 3,758

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. 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 eight risk grades summarized in five 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 watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2021 and December 31, 2020:

September 30, 2021
Pass Watch Sub-<br><br><br>standard Doubtful Total
(dollars in thousands)
Commercial $ 67,547 $ 2,185 $ 310 $ — $ 70,042
SBA Paycheck Protection Program (PPP) 26,042 — — — 26,042
Real estate - commercial 142,353 4,431 2,916 — 149,700
Other real estate construction 31,653 56 254 — 31,963
Real estate 1 - 4 family construction 5,700 — — — 5,700
Real estate - residential 78,696 2,306 957 — 81,959
Home equity 51,765 442 233 — 52,440
Consumer loans 9,081 14 — — 9,095
Other loans 5,394 — — — 5,394
Total $ 418,231 $ 9,434 $ 4,670 $ — $ 432,335

-17-

December 31, 2020
Pass Watch Sub-<br><br><br>standard Doubtful Total
(dollars in thousands)
Commercial $ 61,828 $ 2,321 $ 185 $ — $ 64,334
SBA Paycheck Protection Program (PPP) 74,750 — — — 74,750
Real estate - commercial 143,222 1,113 2,894 — 147,229
Other real estate construction 31,263 344 1,313 — 32,920
Real estate 1 - 4 family construction 7,709 — — — 7,709
Real estate - residential 72,085 2,145 783 — 75,013
Home equity 50,661 661 293 — 51,615
Consumer loans 11,001 19 53 — 11,073
Other loans 3,098 — — — 3,098
Total $ 455,617 $ 6,603 $ 5,521 $ — $ 467,741

Loans that are in non-accrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2021 and December 31, 2020 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, 2021 and December 31, 2020:

September 30, 2021
Performing Non-<br><br><br>Performing Total
(dollars in thousands)
Commercial $ 69,732 $ 310 $ 70,042
SBA Paycheck Protection Program (PPP) 26,042 — 26,042
Real estate - commercial 147,575 2,125 149,700
Other real estate construction 31,963 — 31,963
Real estate 1 – 4 family construction 5,700 — 5,700
Real estate – residential 81,404 555 81,959
Home equity 52,207 233 52,440
Consumer loans 9,095 — 9,095
Other loans 5,394 — 5,394
Total $ 429,112 $ 3,223 $ 432,335
December 31, 2020
--- --- --- --- --- --- ---
Performing Non-<br><br><br>Performing Total
(dollars in thousands)
Commercial $ 64,334 $ — $ 64,334
SBA Paycheck Protection Program (PPP) 74,750 — 74,750
Real estate - commercial 145,153 2,076 147,229
Other real estate construction 31,881 1,039 32,920
Real estate 1 – 4 family construction 7,709 — 7,709
Real estate – residential 74,418 595 75,013
Home equity 51,567 48 51,615
Consumer loans 11,073 — 11,073
Other loans 3,098 — 3,098
Total $ 463,983 $ 3,758 $ 467,741

-18-

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2021 and December 31, 2020.

September 30, 2021
Unpaid<br><br><br>Principal<br><br><br>Balance Recorded<br><br><br>Investment<br><br><br>With No<br><br><br>Allowance Recorded<br><br><br>Investment<br><br><br>With<br><br><br>Allowance Related<br><br><br>Allowance
(dollars in thousands)
Commercial $ 961 $ 1 $ 960 $ 22
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,465 1,689 1,776 69
Other real estate construction — — — —
Real estate 1 - 4 family construction — — — —
Real estate - residential 2,639 1,203 1,436 116
Home equity 233 202 31 1
Consumer loans — — — —
Other loans — — — —
Total $ 7,298 $ 3,095 $ 4,203 $ 208
December 31, 2020
--- --- --- --- --- --- --- --- ---
Unpaid<br><br><br>Principal<br><br><br>Balance Recorded<br><br><br>Investment<br><br><br>With No<br><br><br>Allowance Recorded<br><br><br>Investment<br><br><br>With<br><br><br>Allowance Related<br><br><br>Allowance
(dollars in thousands)
Commercial $ 651 $ — $ 651 $ 20
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,547 2,076 1,471 33
Other real estate construction 1,039 1,039 — —
Real estate 1 - 4 family construction — — — —
Real estate - residential 2,856 1,416 1,440 84
Home equity 48 15 33 10
Consumer loans 13 — 13 —
Other loans — — — —
Total $ 8,154 $ 4,546 $ 3,608 $ 147

The table below shows interest income received on impaired loans by class for the three and nine months ended September 30, 2021 and 2020.

Three Months ended September 30, 2021 Three Months ended September 30, 2020
Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income
(dollars in thousands)
Commercial $ 806 $ 30 $ 693 $ 6
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,415 26 3,576 41
Other real estate construction — — 1,112 1
Real estate 1- 4 family construction — — — —
Real estate - residential 2,718 27 3,122 39
Home equity 234 — 64 —
Consumer loans 4 — 17 —
Other loans — — — —
Total $ 7,177 $ 83 $ 8,584 $ 87

-19-

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income
(dollars in thousands)
Commercial $ 728 $ 42 $ 368 $ 23
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,500 81 3,590 83
Other real estate construction 260 — 848 2
Real estate 1- 4 family construction — — — —
Real estate - residential 2,755 99 3,154 108
Home equity 188 1 72 1
Consumer loans 8 — 19 1
Other loans — — — —
Total $ 7,439 $ 223 $ 8,051 $ 218

Note 8 – Troubled Debt Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are 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 may include 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 be requested.

Loans modified as TDRs are typically already on non-accrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An 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 any selling costs, if the loan is deemed to be collateral dependent.

At September 30, 2021, the Company had $4.1 million in TDRs outstanding, of which one with a balance totaling $46,000 was on a non-accruing basis. Comparatively, the Company had $4.4 million of outstanding TDRs, of which one with a balance of $46,000 was on a non-accruing basis, at December 31, 2020.

For the three and nine months ended September 30, 2021 and 2020, the following table presents a breakdown of the types of concessions made by loan class:

For the three months ended September 30, 2021
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial — $ — $ —
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial 2 1,223 1,223
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 2 252 252
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 4 $ 1,475 $ 1,475

-20-

For the three months ended September 30, 2020
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial — $ — $ —
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial — — —
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 1 23 23
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 1 $ 23 $ 23
For the nine months ended September 30, 2021
--- --- --- --- --- --- ---
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial 1 $ 648 $ 648
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial 2 1,223 1,223
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 3 468 468
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 6 $ 2,339 $ 2,339
For the nine months ended September 30, 2020
--- --- --- --- --- --- ---
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial 2 $ 690 $ 690
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial 1 829 829
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 3 351 351
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 6 $ 1,870 $ 1,870

During the twelve months ended September 30, 2021, there were no TDRs for which there was a payment default. During the twelve months ended September 30, 2020, there was one TDR for which there was a payment default.

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $149,000 in the allowance for loan losses as of September 30, 2021, as a direct result of these TDRs. At September 30, 2020, there was $119,000 in the allowance for loan losses related to TDRs.

-21-

The following table presents the status of the types of loans modified as TDRs within the previous twelve months as of September 30, 2021 and 2020:

Paid In Full Paying as restructured Converted to non-accrual Foreclosure/ Default
Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments
(dollars in thousands)
September 30, 2021
Below market interest rate — $ — — $ — — $ — — $ —
Extended payment Terms — — — — — — — —
Forgiveness of Principal/Other 10 1,253 7 2,462 — — — —
Total 10 $ 1,253 7 $ 2,462 — $ — — $ —
September 30, 2020
Below market interest rate — $ — 1 $ 219 — $ — — $ —
Extended payment Terms — — — — — — — —
Forgiveness of Principal/Other 1 91 8 1,864 — — — —
Total 1 $ 91 9 $ 2,083 — $ — — $ —

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which was signed into law on March 27, 2020, allows the Company to suspend the TDR classifications described above in an effort to provide relief to borrowers impacted by COVID-19. The Consolidated Appropriations Act, 2021, or CAA, which was signed into law on December 27, 2020, extends the expiration of TDR suspensions as set forth in the CARES Act. The Company has elected to adopt this suspension until January 1, 2022 or 60 days after the national emergency terminates, per the CAA. Modifications of loans subsequent to March 1, 2020 for COVID-19 reasons, and that were current as of December 31, 2019, are not considered TDRs and are tracked internally as “COVID-19 Modifications”.

The Company initially provided up to a three-month deferral period or conversion to interest-only repayment for up to three months. Additional extensions have been considered. Loans are reviewed on a case-by-case basis, and the Company will generally work with borrowers that express an interest in the assistance program. As of September 30, 2021, the Company had no current outstanding modified loans. Additionally, 208 previously modified loans with outstanding balances totaling $53.6 million have come out of deferment. Of the loans removed from deferment, 49 with balances totaling $11.1 million were paid off, 156 loans totaling $42.3 million were out of accommodation and current at September 30, 2021 and three loans totaling $170,000 were removed due to noncompliance.

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 the 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 three office locations, two of which are branch locations, with remaining terms of five to eight 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, 2021, operating lease ROU assets were $2.2 million and the lease liability was $2.3 million, compared to ROU assets of $1.7 million and a lease liability of $1.8 million at September 30, 2020. Lease costs associated with all leases was $99,000 and $296,000 for the three months and nine months ended September 30, 2021, respectively.

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

Nine Months Ended September 30,
2021 2020
(in thousands except percent and period data)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 292 $ 285
Right-of-use assets obtained in exchange for new operating lease liabilities 2,186 1,699
Weighted-average remaining lease term - operating leases, in years 6.1 7.2
Weighted-average discount rate - operating leases 2.46 % 2.95 %

The table below summarizes the maturity of remaining lease liabilities:

September 30, 2021
(in thousands)
2021 $ 98
2022 400
2023 408
2024 417
2025 427
2026 and thereafter 753
Total lease payments 2,503
Less: Interest (192 )
Present value of lease liabilities 2,311

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, 2021 and December 31, 2020, outstanding financial instruments whose contract amounts represent credit risk were approximately:

September 30, 2021 December 31, 2020
(dollars in thousands)
Commitments to extend credit $ 153,057 $ 127,986
Credit card commitments 13,955 12,821
Standby letters of credit 8,151 8,277
Total commitments $ 175,163 $ 149,084

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.

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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 for 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 comprised 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.

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The following tables provide fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

September 30, 2021
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Treasury $ 16,423 $ 16,423 $ — $ —
U.S. Government agencies 39,567 — 39,567 —
GSE - Mortgage-backed securities and CMO’s 100,985 — 100,985 —
Asset-backed securities 37,562 — 37,562 —
State and political subdivisions 86,431 — 86,431 —
Corporate bonds 10,081 — 10,081 —
Equity securities 409 409 — —
Mortgage banking derivatives 1,196 — 160 1,036
Total assets at fair value on a recurring basis $ 292,654 $ 16,832 $ 274,786 $ 1,036
December 31, 2020
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Government agencies $ 37,389 $ — $ 37,389 $ —
GSE - Mortgage-backed securities and CMO’s 41,496 — 41,496 —
Asset-backed securities 39,281 — 39,281 —
State and political subdivisions 69,164 — 69,164 —
Corporate bonds 4,183 — 4,183 —
Equity securities 1,352 1,352 — —
Mortgage banking derivatives 2,073 — — 2,073
Total assets at fair value on a recurring basis $ 194,938 $ 1,352 $ 191,513 $ 2,073
Mortgage banking derivatives $ 388 $ — $ 388 $ —
Total liabilities at fair value on a recurring basis $ 388 $ — $ 388 $ —

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

September 30, 2021
(dollars in thousands)
Mortgage banking derivatives: Interest rate lock commitments Total
Balance at December 31, 2020 $ 2,073 $ 2,073
Change in fair value:
Included in income from mortgage banking (1,037 ) (1,037 )
Balance at September 30, 2021 $ 1,036 $ 1,036

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The fair value of mortgage interest rate lock commitments at September 30, 2021 was calculated based on a notional amount of $32.6 million. Significant unobservable inputs are used to determine the fair value of these derivatives. For the nine months ended September 30, 2021, 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 85.95% determined by loan product, loan stage, and loan purpose. The fair value of mortgage interest rate lock commitments at December 31, 2020 was calculated based on a notional amount of $66.5 million. Significant unobservable inputs included estimated net margin to be earned from loan sales, anticipated remaining costs associated with origination of the loan of 0.83%, and a projected pull-through rate of 86.0% at December 31, 2020. 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, 2021 and December 31, 2020:

September 30, 2021
(dollars in thousands)
Total Level 1 Level 2 Level 3
Impaired loans $ 3,995 $ — $ — $ 3,995
Total assets at fair value on a nonrecurring basis $ 3,995 $ — $ — $ 3,995
December 31, 2020
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Impaired loans $ 3,461 $ — $ — $ 3,461
Total assets at fair value on a nonrecurring basis $ 3,461 $ — $ — $ 3,461

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2021
Valuation Technique Unobservable Input General<br><br><br>Range
Nonrecurring measurements:
Impaired loans Discounted appraisals Collateral discounts and Estimated costs to sell 0 – 25%
Discounted cash flows Discount rates 4%-8.75%
December 31, 2020
--- --- --- ---
Valuation Technique Unobservable Input General<br><br><br>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, 2021, impaired loans were being evaluated with discounted expected cash flows for performing TDRs and discounted appraisals were being used on collateral dependent loans.

Note 12 – Fair Values of Financial Instruments and Interest Rate Risk

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, 2021 and December 31, 2020 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, 2021 and December 31, 2020:

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September 30, 2021
Carrying<br><br><br>Value Estimated<br><br><br>Fair Value Level 1 Level 2 Level 3
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 116,074 $ 116,063 $ 112,588 $ 3,475 $ —
Securities available for sale 291,049 291,049 16,423 274,626 —
Securities held to maturity 28,588 29,687 — 16,777 12,910
Equity securities 409 409 409 — —
Loans held for investment, net 428,665 424,378 — — 424,378
Loans held for sale 9,737 9,737 — 9,737 —
Restricted stock 921 921 921 — —
Loan servicing rights 5,125 5,411 — 5,411 —
Mortgage banking derivatives 1,196 1,196 — 160 1,036
Accrued interest receivable 2,679 2,679 — — 2,679
FINANCIAL LIABILITIES
Deposits $ 813,324 $ 813,310 $ — $ 813,310 $ —
Short-term borrowings 1,130 1,130 — 1,130 —
Long-term borrowings 29,511 29,271 — — 29,271
Mortgage banking derivatives — — — — —
Accrued interest payable 69 69 — — 69
December 31, 2020
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br><br><br>Value Estimated<br><br><br>Fair Value Level 1 Level 2 Level 3
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 88,868 $ 88,879 $ 87,623 $ 1,256 $ —
Securities available for sale 191,513 191,513 — 191,513 —
Securities held to maturity 28,207 29,600 — 19,664 9,936
Equity securities 1,352 1,352 1,352 — —
Loans held for investment, net 463,339 458,706 — — 458,706
Loans held for sale 6,959 6,959 — 6,959 —
Restricted stock 1,166 1,166 1,166 — —
Loan servicing rights 3,957 4,054 — 4,054 —
Mortgage banking derivatives 2,073 2,073 — — 2,073
Accrued interest receivable 2,523 2,523 — — 2,523
FINANCIAL LIABILITIES
Deposits $ 743,196 $ 743,378 $ — $ 743,378 $ —
Short-term borrowings 710 710 — 710 —
Long-term debt 10,992 10,909 — — 10,909
Mortgage banking derivatives 388 388 — 388 —
Accrued interest payable 21 21 — — 21

At September 30, 2021 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.

Note 13 – Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount

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expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. During 2019, the effective date was extended to fiscal years beginning on or after December 15, 2022 for public entities that qualify as smaller reporting companies, per the Securities and Exchange Commission definition, which currently includes the Company. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We have entered into a contract to outsource our current model with a CECL-ready vendor. We are currently working on setting, and supporting, the model assumptions for the various methods of determining credit losses within the CECL methodology supported by the software. The impact of the adoption is dependent on loan portfolio composition and credit quality at adoption date, as well as economic conditions and forecasts at that time.

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 will discontinue 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 FASB issued ASU 2020-04 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 can be applied beginning March 12, 2020 and will sunset December 31, 2022.  The Company currently holds loan contracts that reference LIBOR, and is evaluating the most effective manner in which to modify those contracts, but does not anticipate material financial impact.

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.

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 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 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, 2021 and December 31, 2020.

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Notional Amount Fair Value
(dollars in thousands)
Balance at September 30, 2021
Included in mortgage banking derivatives asset:
Interest rate lock commitments $ 32,564 $ 1,036
Forward sales commitments 246 7
To-be-announced mortgage-backed securities trades 35,500 153
Included in mortgage banking derivatives liability:
Forward sales commitments — —
To-be-announced mortgage-backed securities trades — —
Balance at December 31, 2020
Included in mortgage banking derivatives asset:
Interest rate lock commitments 66,452 2,073
Forward sales commitments — —
To-be-announced mortgage-backed securities trades — —
Included in mortgage banking derivatives liability:
Forward sales commitments 47,260 388
To-be-announced mortgage-backed securities trades — —

Note 15 – Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans and commercial real estate loans with available credit of $96.2 million at September 30, 2021. There were no long-term advances under this line at September 30, 2021. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A. during 2020. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of September 30, 2021, there was no outstanding balance on the line of credit. This loan carries certain debt covenants, and as of September 30, 2021, the Company was in compliance with all of these covenants.

During the third quarter of 2019, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $10.0 million, of which the entire $10.0 million was outstanding at both September 30, 2021 and December 31, 2020. These securities have a final maturity date of September 30, 2029 and may be redeemed by the Company on or after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company will have a twenty percent reduction beginning at September 30, 2024.

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 redeemable 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 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 SOFR plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though redeemable 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 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. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company will have a twenty percent reduction beginning at September 3, 2026 and September 3, 2031 for the 10-year and 15-year subordinated notes, respectively.

Debt is reported net of unamortized debt issuance costs of $481,000 at September 30, 2021.  There were no unamortized debt issuance costs at December 31, 2020.

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As of September 30, 2021, the scheduled maturities of these long-term borrowings are as follows:

Year ending December 31,
(dollars in thousands)
2021 $ —
2022 —
2023 —
2024 —
2025 —
Thereafter 29,992
29,992
Less: unamortized debt issuance costs (481 )
Total $ 29,511

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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 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 September 30, 2021 and December 31, 2020.

During the nine months ended September 30, 2021, the Company’s total assets increased $93.2 million, from $827.8 million to $921.0 million.

Cash and cash equivalents increased $27.2 million during the nine months ended September 30, 2021. The increase is related to receipt of SBA PPP loan forgiveness and IRS Economic Impact Payments.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $99.9 million to $319.6 million for the nine-month period ended September 30, 2021. At September 30, 2021, the Company had net unrealized losses on securities available for sale of $714,000, compared to net unrealized gains of $5.4 million at December 31, 2020. The significant decline in fair value is directly related to the increase in market interest rates at September 30, 2021 compared to December 31, 2020, as the market signals recovery from the COVID-19 outbreak worldwide.

During the first quarter of 2021, the Company sold a portion of an equity security investment bringing the principal value down to $270,000 at September 30, 2021 from $901,000 at December 30, 2020. At September 30, 2021, the unrealized gain on the investment totaled $139,000, resulting in a fair value of $409,000 for the security.

Loans held for investment decreased from $467.7 million to $432.3 million, a decrease of $35.4 million for the nine-month period ended September 30, 2021. The Company experienced a net decline in the commercial other real estate construction, real estate 1-4 family construction and consumer loans sectors. During the first nine months of 2021, the Company funded 879 SBA PPP Round 2 loans for a total of $46.4 million. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. These new PPP loans, however, were offset by the forgiveness of $79.2 million of SBA PPP loans originally funded during 2020 and forgiveness of $20.9 million of SBA PPP Round 2 loans. Loans held for sale increased 39.9%, or $2.8 million, as many of the loans produced near the September 30, 2021 quarter-end date were not sold on the secondary market until early October.

The allowance for loan losses was $3.7 million at September 30, 2021, which represented 0.85% of the total loans held for investment, compared to $4.4 million or 0.94% of the total loans held for investment at December 31, 2020. Additional discussion regarding the decrease in the allowance is included in the Asset Quality section below.

Other changes in our consolidated assets are primarily related to loan servicing assets, which increased $1.2 million from December 31, 2020 to September 30, 2021 due to retention of servicing rights related to sustained sales of residential mortgage loans. A reduction in loan servicing asset amortization resulting from the decline in refinance activity also contributed to this increase. Other assets decreased $266,000 during the first nine months of 2021, primarily due to the sale of an investment in a community development project, originally purchased in the first quarter of 2020.

Customer deposits, our primary funding source, experienced a $70.1 million increase during the nine-month period ended September 30, 2021, increasing from $743.2 million to $813.3 million, a 9.44% increase. In addition to receipt of government stimulus deposits and SBA PPP loan forgiveness, a large portion of this increase is related to the funding of SBA PPP Round 2 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 $37.9 million, interest checking and money market accounts increased $23.0 million and savings deposits increased $18.5 million during the nine months ended September 30, 2021. Time deposits decreased by $4.5 million during the same period as customers transitioned to liquid accounts.

Total short-term borrowings increased $420,000 for the nine-month period. At September 30, 2021, the Company had $29.5 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

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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 redeemable 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 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 SOFR plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though redeemable 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 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 at September 30, 2021.

Other changes in consolidated liabilities are primarily related to increases in accruals for bonuses, donations and income taxes totaling $2.2 million. These increases are offset by a decline in the mortgage forward sales commitments liability. Mortgage forward sales commitments decreased $388,000 from $388,000 at December 31, 2020 to $0 at September 30, 2021, because of the rise in interest rates since year-end.  As rates rise, the value of the mandatory commitment deteriorates, and the price required to exit out of the commitment decreases.

At September 30, 2021, total shareholders’ equity was $62.2 million, an increase of $2.9 million from December 31, 2020. Net income for the nine-month period was $8.9 million. Unrealized gains on investment securities, net of tax, declined by $4.7 million to a loss position as the yield curve continues to steepen. The Company repurchased 102,509 shares of common stock at a total cost of $815,000 during the first nine months of 2021. The Company paid $422,000 in dividends attributable to noncontrolling interest during the nine months of 2021. On October 19, 2021, the Company’s Board of Directors declared a 3% stock dividend payable on November 23, 2021 to shareholders of record on November 9, 2021. All information presented in the interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend. 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, 2021 and 2020.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.7 million for three months ended September 30, 2021, as compared to $1.6 million for the three months ended September 30, 2020, an increase of $1.1 million. Net income available to common shareholders was $2.5 million, or $0.35 per common share, for the three months ended September 30, 2021, compared to $1.4 million, or $0.20 per common share, at September 30, 2020. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the three months ended September 30, 2021 was $7.0 million, compared to $5.7 million for the three months ended September 30, 2020, an increase of $1.3 million. During the third quarter of 2021, the average yield on our interest-earning assets increased twelve basis points to 3.54% from the same period in 2020, and the average rate we paid for our interest-bearing liabilities decreased ten basis points to 0.26%. These changes resulted in a higher interest rate spread of 3.28% as of September 30, 2021, compared to 3.06% as of September 30, 2020. Our net interest margin was 3.37% and 3.18% for the comparable periods in 2021 and 2020, respectively.

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The following table presents average balance sheet and a net interest income analysis for the three months ended September 30, 2021 and 2020:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2021 2020 2021 2020 2021 2020
Interest-earning assets:
Taxable securities $ 214,624 $ 150,035 $ 740 $ 711 1.37 % 1.89 %
Nontaxable securities (1) 53,967 31,338 309 215 2.88 % 3.53 %
Short-term investments 120,014 77,341 53 26 0.18 % 0.13 %
Equity Securities 411 1,235 5 34 4.83 % 10.95 %
Taxable loans 437,845 456,624 6,191 5,124 5.61 % 4.46 %
Non-taxable loans (1) 7,326 9,657 51 66 3.48 % 3.53 %
Total interest-earning assets 834,187 726,230 7,349 6,176 3.54 % 3.42 %
Interest-bearing liabilities:
Interest-bearing deposits 546,252 488,100 176 312 0.13 % 0.25 %
Short-term borrowed funds 1,167 548 1 0 0.34 % 0.00 %
Long-term debt 16,000 10,989 190 142 4.71 % 5.14 %
Total interest-bearing liabilities 563,419 499,637 367 454 0.26 % 0.36 %
Net interest spread $ 270,768 $ 226,593 $ 6,982 $ 5,722 3.28 % 3.06 %
Net interest margin (1) (% of earning assets) 3.37 % 3.18 %
^(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 for loan losses was $1.1 million for the three months ended September 30, 2021, compared to a provision of $1.1 million for the same period in 2020. There were net loan recoveries of $553,000 for the three months ended September 30, 2021 compared to net loan recoveries of $2,000 during the same period of 2020. 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 $986,000 for the three-month period ended September 30, 2021, as compared to the same period in 2020. The primary factor contributing to the decrease was a decline in income from mortgage loan sales as production began to level out after the surge in refinancing caused by the lower interest rate environment during the COVID-19 pandemic.

Income from other service fees and commissions increased $254,000 to $842,000 primarily due to increased fees for assets under management from our investment division. Service charges on deposits accounts increased slightly by $12,000 during the three-month period ended September 30, 2021.

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,
2021 2020
(in thousands)
Income from debit card transactions $ 535 $ 455
Income from credit card transactions 130 111
Gross interchange and transaction fee income 665 566
Network costs - debit card 249 178
Network costs - credit card 155 122
Total $ 261 $ 266

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Noninterest Expense

Noninterest expense for the three months ended September 30, 2021 increased by $1.2 million from the same period in 2020, to $9.2 million. Salaries and benefits, the largest component of noninterest expense, increased $579,000 to account for wage and benefit cost increases.

Total other noninterest expense increased $801,000 for the three months ended September 30, 2021 compared to the same period in 2020. This change was due to market valuation adjustments that increased the expense associated with supplemental executive retirement plans by $672,000. The table below reflects the composition of other noninterest expense.

Three Months Ended September 30,
2021 2020
(dollars in thousands)
Postage $ 47 $ 51
Telephone and data lines 48 34
Office supplies and printing 25 31
Shareholder relations expense 58 32
Dues and subscriptions 80 113
Other 1,146 342
Total $ 1,404 $ 603

Income Tax Expense

The Company had income tax expense of $732,000 for the three months ended September 30, 2021 at an effective tax rate of 21.4% compared to income tax expense of $618,000 with an effective tax rate of 28.1% in the comparable 2020 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, 2021, the effective tax rate decreased due to an additional tax accrual in the 2020 period related to a supplemental executive retirement plan, or SERP, distribution.

Results of Operations for the Nine Months Ended September 30, 2021 and 2020.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $8.9 million for the nine months ended September 30, 2021, as compared to $3.5 million for the nine months ended September 30, 2020, an increase of $5.4 million. Net income available to common shareholders was $8.4 million or $1.17 per common share, for the nine months ended September 30, 2021, compared to $3.1 million or $0.42 per common share, for the nine months ended September 30, 2020. 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, 2021 was $19.8 million, compared to $15.9 million for the nine months ended September 30, 2020, an increase of $3.9 million. During the first nine months of 2021, the average yield on our interest-earning assets decreased two basis points to 3.52%, and the average rate we paid for our interest-bearing liabilities decreased twenty-six basis points to 0.25%. These changes resulted in a higher interest rate spread of 3.27% as of September 30, 2021, compared to 3.03% as of September 30, 2020. Our net interest margin was 3.35% and 3.18% for the comparable periods in 2021 and 2020, respectively.

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The following table presents average balance sheet and a net interest income analysis for the nine months ended September 30, 2021 and 2020:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2021 2020 2021 2020 2021 2020
Interest-earning assets:
Taxable securities $ 198,826 $ 115,824 $ 2,247 $ 1,772 1.51 % 2.04 %
Nontaxable securities ^(1)^ 44,166 24,582 793 509 3.05 % 3.57 %
Short-term investments 95,128 112,343 96 616 0.13 % 0.73 %
Equity Securities 511 821 15 34 3.92 % 5.53 %
Taxable loans 452,590 411,462 17,477 14,570 5.16 % 4.73 %
Non-taxable loans ^(1)^ 7,744 9,819 162 204 3.55 % 3.58 %
Total interest-earning assets 798,965 674,851 20,790 17,705 3.52 % 3.54 %
Interest-bearing liabilities:
Interest-bearing deposits 523,916 462,155 562 1,412 0.14 % 0.41 %
Short-term borrowed funds 1,345 482 3 2 0.30 % 0.55 %
Long-term debt 12,710 10,798 458 417 4.82 % 5.16 %
Total interest-bearing liabilities 537,971 473,435 1,023 1,831 0.25 % 0.52 %
Net interest spread $ 260,994 $ 201,416 $ 19,767 $ 15,874 3.27 % 3.03 %
Net interest margin ^(1)^(% of earning assets) 3.35 % 3.18 %
^(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 for loan losses was $1.2 million for the nine months ended September 30, 2021, compared to a provision of $2.5 million for the same period in 2020. There were net loan recoveries of $500,000 for the nine months ended September 30, 2021, as compared to net loan recoveries of $48,000 during the same period of 2020. 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 $2.9 million for the nine-month period ended September 30, 2021, as compared to the same period in 2020. The gain on sale of securities increased $914,000 to $991,000 at September 30, 2021 compared to $77,000 at September 30, 2020 as the Company worked to reduce the duration of the investment portfolio in an attempt to protect capital as long-term interest rates rise.

Another factor contributing to the overall increase was an increase of $771,000 in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance and purchase transactions during the first nine months of 2021.

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,
2021 2020
(in thousands)
Income from debit card transactions $ 1,563 $ 1,248
Income from credit card transactions 373 323
Gross interchange and transaction fee income 1,936 1,571
Network costs - debit card 680 522
Network costs - credit card 437 409
Total $ 819 $ 640

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Noninterest Expense

Noninterest expense for the nine months ended September 30, 2021 increased by $3.8 million from the same period in 2020, to $25.6 million. Salaries and benefits, the largest component of noninterest expense, increased $1.7 million 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 $280,000 to $689,000 for the nine months ended September 30, 2021. Marketing and donations increased $331,000 as the Company makes a conscious effort to support the communities we serve by giving back and supporting economic development and growth.

Total other noninterest expense increased $1.4 million for the nine months ended September 30, 2021 compared to the same period in 2020. This change was due to market valuation adjustments that increased the expense associated with supplemental executive retirement plans by $1.1 million. The table below reflects the composition of other noninterest expense.

Nine Months Ended September 30,
2021 2020
(in thousands)
Postage $ 150 $ 142
Telephone and data lines 146 128
Office supplies and printing 77 81
Shareholder relations expense 130 96
Dues and subscriptions 286 284
Other 2,036 682
Total $ 2,825 $ 1,413

Income Tax Expense

The Company had income tax expense of $2.4 million for the nine months ended September 30, 2021 at an effective tax rate of 21.2% compared to income tax expense of $1.1 million with an effective tax rate of 24.4% in the comparable 2020 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, 2021, the effective tax rate decreased due to an additional tax accrual in the 2020 period related to a supplemental executive retirement plan, or SERP, distribution.

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

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probable losses, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well 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 nine months of 2021, the average effective credit score of the portfolio, excluding loans in default, decreased slightly from 772 to 768. 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. 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.

At September 30, 2021, 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 $7.3 million, compared to $8.2 million at December 31, 2020, a net decrease of $857,000. The decrease is related to one large relationship paying off in the first quarter of 2021. Total non-accrual loans, which are a component of impaired loans, decreased from $3.8 million at December 31, 2020 to $3.2 million at September 30, 2021. During the first nine months of 2021, eight additional loans totaling $1.5 million were added to impaired loans; however, nine loans totaling $2.0 million were paid off.  We also had net pay downs of $380,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased nine basis points from 0.94% at December 31, 2020 to 0.85% at September 30, 2021. The collectively evaluated allowance as a percentage of collectively evaluated loans was 0.93% at December 31, 2020 and 0.81% at September 30, 2021. The decrease is attributable to the economic recovery occurring as the COVID-19 outbreak is contained and businesses increase operations. The individually evaluated allowance as a percentage of individually evaluated loans increased from 1.81% to 2.85% for the same periods, mainly due to six relationships deemed impaired during the first nine months of 2021, which required additional reserves to cover probable losses.

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 0.80% at December 31, 2020 to 0.75% at September 30, 2021, and was related to the large nonaccrual relationship that was paid off in the first quarter.

As of September 30, 2021, management believed the level of the allowance for loan losses was appropriate in light of the risk inherent in the loan portfolio.

Other real estate owned remained at $0 through September 30, 2021, as there were no loans foreclosed on during the first nine months of 2021.

Troubled debt restructured loans, included in impaired loans, totaled $4.1 million at September 30, 2021 and $4.4 million at December 31, 2020. At September 30, 2021, there was one troubled debt restructured loan in non-accrual status, which had a balance of $46,000.

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 September 30, 2021, the Company had no current outstanding modified loans. Additionally, 208 previously modified loans with outstanding balances totaling $53.6 million have come out of deferment. Of the loans removed from deferment, 49 loans totaling $11.1 million have paid off, 156 loans totaling $42.3 million were out of accommodation and current at September 30, 2021 and three loans totaling $170,000 were removed due to noncompliance.

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The following table shows the comparison of nonperforming assets at September 30, 2021 and December 31, 2020:

Nonperforming Assets

(dollars in thousands)

September 30, 2021 December 31, 2020
Nonperforming assets:
Accruing loans past due 90 days or more $ — $ —
Non-accrual loans 3,223 3,758
Other real estate owned — —
Total nonperforming assets $ 3,223 $ 3,758
Allowance for loans losses $ 3,670 $ 4,402
Nonperforming loans to total loans 0.75 % 0.80 %
Allowance for loan losses to total loans 0.85 % 0.94 %
Nonperforming assets to total assets 0.35 % 0.45 %
Allowance for loan losses to nonperforming loans 113.87 % 117.14 %

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 $43.0 million at September 30, 2021, with available credit of $43.0 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $96.2 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $35.4 million and the issuance of commercial paper. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of September 30, 2021, we had $3.0 million that had not been extended and remained available for use on the line of credit. The Company has also secured long-term debt from other sources. Total outstanding debt from these sources included $29.5 million of junior subordinated debt at September 30, 2021 compared to $10.0 million of junior subordinated debt and a $1.0 million draw on the TIB line of credit at December 31, 2020.

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.

As of September 30, 2021, the Company’s subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 30, 2021, 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.

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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, 2021, 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 changed materially since our 2020 Annual Report to Shareholders, which is filed as Exhibit 13 to our 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 5, 2021. 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 redeemable on or after September 3, 2026, and initially pay interest quarterly at an annual rate of 3.5%. The 15-year subordinated notes mature on September 3, 2036, though redeemable on or after September 3, 2031, and initially pay interest quarterly at an annual rate of 4.0%. The subordinated debt has been structured to qualify as and is included in the calculation of Tier 2 capital at the Company level. The issuance of these subordinated notes increased long-term debt by $18.5 million from December 31, 2020 to September 30, 2021.

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 2021. 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.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

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.

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Item 1A. Risk Factors.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2021.

(a) Total<br><br><br>Number of<br><br><br>Shares<br><br><br>Purchased (b) Average<br><br><br>Price Paid per<br><br><br>Share (c) Total Number<br><br><br>of Shares<br><br><br>Purchased as<br><br><br>Part of Publicly<br><br><br>Announced<br><br><br>Plans or Program^(1)^ (d) Maximum<br><br><br>Dollar Value (in thousands) of<br><br><br>Shares that May Yet<br><br><br>Be Purchased Under<br><br><br>the Plans
July 1, 2021 Through July 31, 2021 — $ — — $ —
August 1, 2021 Through August 31, 2021 5,108 $ 8.94 — $ —
September 1, 2021 Through September 30, 2021 9,500 $ 8.70 — $ —
Total 14,608 $ 8.78 — $ —

^(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<br><br><br>Number Description of Exhibit
4.1 Form of 10-Year Subordinated Note (Incorporated by reference to Exhibit 4.1 of Registrant's Current Report on Form 8-K filed with the SEC on September 8, 2021)
4.2 Form of 15-Year Subordinated Note (Incorporated by reference to Exhibit 4.2 of Registrant's Current Report on Form 8-K filed with the SEC on September 8, 2021)
10.1 Form of 10-Year Subordinated Note Purchase Agreement (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K filed with the SEC on September 8, 2021)
10.2 Form of 15-Year Subordinated Note Purchase Agreement (Incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K filed with the SEC on September 8, 2021)
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, 2021, 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 2, 2021 By: /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: November 2, 2021 By: /s/ R. David Beaver, III
R. David Beaver, III
Principal Financial Officer

-42-

uwhr-ex311_6.htm

Exhibit 31.1

UWHARRIE CAPITAL CORP

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a -14(a)

I, Roger L. Dick, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2021 of Uwharrie Capital Corp (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: November 2, 2021 /s/ Roger L. Dick
--- --- ---
Roger L. Dick
President and Chief Executive Officer

uwhr-ex312_8.htm

Exhibit 31.2

UWHARRIE CAPITAL CORP

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Rule 13a -14(a)

I, R. David Beaver, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2021 of Uwharrie Capital Corp the (“registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: November 2, 2021 /s/ R. David Beaver, III
--- --- ---
R. David Beaver, III
Principal Financial Officer

uwhr-ex32_7.htm

Exhibit 32

Certification pursuant to 18 U.S.C. 1350 as adopted pursuant

to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned each hereby certifies that, to his knowledge, (i) the Form 10-Q filed by Uwharrie Capital Corp (the “Issuer”) for the quarter ended September 30, 2021, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: November 2, 2021 /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: November 2, 2021 /s/ R. David Beaver, III
R. David Beaver, III
Principal Financial Officer

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