Equibles

10-Q

UWHARRIE CAPITAL CORP (UWHR)

10-Q 2024-08-06 For: 2024-06-30
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 June 30, 2024

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>Incorporation or Organization) (I.R.S. Employer<br><br>Identification No.)
132 NORTH FIRST STREET<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>Symbol(s) Name of each exchange on which registered
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,012,280 shares of common stock outstanding as of August 5, 2024.

Table of Contents

Page No.
Part I. FINANCIAL INFORMATION 2
Item 1 - Financial Statements (Unaudited) 2
Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 2
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023 3
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023 4
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023 5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 6
Notes to Consolidated Financial Statements 7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 34
Item 4 - Controls and Procedures 34
Part II. OTHER INFORMATION 35
Item 1 - Legal Proceedings 35
Item 1A - Risk Factors 35
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3 - Defaults Upon Senior Securities 35
Item 4 - Mine Safety Disclosures 35
Item 5 - Other Information 35
Item 6 - Exhibits 36
Signatures 37

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financial Information

Item 1. Financial Statements.

December 31, 2023*
ASSETS
Cash and due from banks 11,195 $ 7,407
Interest-earning deposits with banks 46,276 56,027
Cash and cash equivalents 57,471 63,434
Securities available for sale, at fair value (amortized cost 384,893 and 369,301 respectively) 350,764 336,714
Securities held to maturity, at amortized cost (fair value 24,656 and 25,736 respectively) 27,252 28,600
Less allowance for credit losses on securities held to maturity (66 ) (56 )
Net securities held to maturity 27,186 28,544
Equity securities, at fair value 324 302
Loans held for sale 3,611 4,695
Loans held for investment 636,738 592,071
Less allowance for credit losses on loans (5,908 ) (5,561 )
Net loans held for investment 630,830 586,510
Premises and equipment, net 14,552 15,089
Interest receivable 4,688 4,393
Restricted stock 1,709 1,672
Bank owned life insurance 7,864 7,793
Deferred income tax benefit 9,056 8,910
Loan servicing assets 4,089 4,287
Mortgage banking derivatives 798 852
Other assets 10,318 9,396
Total assets 1,123,260 $ 1,072,591
LIABILITIES
Deposits:
Demand noninterest-bearing 286,517 $ 269,998
Interest checking and money market accounts 391,245 417,318
Savings deposits 95,208 101,193
Time deposits, 250,000 and over 128,162 78,046
Other time deposits 122,943 115,158
Total deposits 1,024,075 981,713
Short-term borrowed funds 6,400 1,379
Long-term debt 29,123 29,104
Mortgage banking derivatives 94 288
Other liabilities 11,436 10,666
Total liabilities 1,071,128 1,023,150
Off balance sheet items, commitments and contingencies (Note 9)
SHAREHOLDERS’ EQUITY
Common stock, 1.25 par value: 20,000,000 shares authorized; shares issued and   outstanding 7,068,577 and 7,124,438 at June 30, 2024 and December 31, 2023, respectively 8,836 8,905
Additional paid-in capital 12,510 12,876
Undivided profits 46,419 42,105
Accumulated other comprehensive loss (26,288 ) (25,100 )
Total Uwharrie Capital Corp shareholders’ equity 41,477 38,786
Noncontrolling interest 10,655 10,655
Total shareholders’ equity 52,132 49,441
Total liabilities and shareholders’ equity 1,123,260 $ 1,072,591

All values are in US Dollars.

(*) Derived from audited consolidated financial statements

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

Six Months Ended June 30,
2023 2024 2023
Interest Income
Loans, including fees 9,285 $ 6,989 $ 18,079 $ 13,356
Investment securities:
Investment securities, taxable 3,011 2,623 5,932 5,115
Investment securities, non-taxable 310 323 622 693
Equity Securities 5 5 10 10
Interest-earning deposits with banks and federal funds sold 710 1,181 1,336 2,251
Total interest income 13,321 11,121 25,979 21,425
Interest Expense
Interest checking and money market accounts 1,591 1,485 3,190 2,907
Savings deposits 135 88 274 168
Time deposits, 250,000 and over 1,146 496 2,004 792
Other time deposits 1,225 643 2,358 961
Short-term borrowed funds 76 10 137 19
Long-term debt 332 332 662 666
Total interest expense 4,505 3,054 8,625 5,513
Net interest income 8,816 8,067 17,354 15,912
Provision for (recovery of) credit losses on:
Loans 410 101 405 391
Securities held to maturity — 1 10 (5 )
Unfunded loan commitments 21 7 (14 ) —
Total provision for (recovery of) credit losses 431 109 401 386
Net interest income after provision for (recovery of) credit losses 8,385 7,958 16,953 15,526
Noninterest Income
Service charges on deposit accounts 267 264 535 513
Other service fees and commissions 897 822 1,828 1,711
Interchange and card transaction fees, net 322 315 610 619
Gain (loss) on sale/call of securities — 9 (148 ) (42 )
Realized/unrealized gain (loss) on equity securities (19 ) (23 ) 22 11
Income from mortgage banking 606 891 1,440 1,585
Supplemental executive retirement plan gain (loss) (34 ) 317 (46 ) (18 )
Other income 187 91 314 289
Total noninterest income 2,226 2,686 4,555 4,668
Noninterest Expense
Salaries and employee benefits 5,145 4,932 10,359 9,676
Net occupancy expense 429 432 854 885
Equipment expense 218 195 425 383
Data processing costs 203 204 433 408
Loan costs 51 98 84 198
Professional fees and services 262 179 526 437
Marketing and donations 339 342 705 724
Electronic banking expense 113 141 213 270
Software amortization and maintenance 329 296 659 603
FDIC insurance 126 117 249 234
Supplemental executive retirement plan gain (loss) (34 ) 317 (46 ) (18 )
Other noninterest expense 651 589 1,253 1,167
Total noninterest expense 7,832 7,842 15,714 14,967
Income before income taxes 2,779 2,802 5,794 5,227
Income taxes 566 579 1,198 1,050
Net income 2,213 $ 2,223 $ 4,596 $ 4,177
Consolidated net income 2,213 $ 2,223 $ 4,596 $ 4,177
Less: net income attributable to noncontrolling interest (141 ) (141 ) (282 ) (280 )
Net income attributable to Uwharrie Capital Corp and common shareholders 2,072 2,082 4,314 3,897
Net income per common share
Basic 0.29 $ 0.29 $ 0.61 $ 0.54
Diluted 0.29 $ 0.29 $ 0.61 $ 0.54
Weighted average common shares outstanding
Basic 7,093,666 7,215,163 7,108,070 7,215,891
Diluted 7,093,666 7,215,163 7,108,070 7,215,891

All values are in US Dollars.

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(dollars in thousands)
Net income $ 2,213 $ 2,223 $ 4,596 $ 4,177
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities (97 ) (2,889 ) (1,542 ) 2,975
Related tax effect 22 664 354 (695 )
Reclassification of (gain) loss recognized in net income — (9 ) — 42
Related tax effect — 2 — (8 )
Total other comprehensive income (loss) (75 ) (2,232 ) (1,188 ) 2,314
Comprehensive income (loss) 2,138 (9 ) 3,408 6,491
Less: Comprehensive income attributable to noncontrolling interest (141 ) (141 ) (282 ) (280 )
Comprehensive income (loss) attributable to Uwharrie Capital Corp $ 1,997 $ (150 ) $ 3,126 $ 6,211

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

Number of<br>Common<br>Shares<br>Issued Common<br>Stock Additional<br>Paid-in<br>Capital Undivided<br>Profits Accumulated<br>Other<br>Comprehensive<br>Loss Noncontrolling<br>Interest Total
(dollars in thousands, except share data)
Balance, March 31, 2023 7,075,125 $ 8,844 $ 12,633 $ 36,930 $ (27,219 ) $ 10,655 $ 41,843
Net Income — — — 2,082 — 141 2,223
Repurchase of common stock (17,278 ) (21 ) (112 ) — — — (133 )
Other comprehensive loss — — — — (2,232 ) — (2,232 )
Record preferred stock dividend series B <br>     (noncontrolling interest) — — — — — (103 ) (103 )
Record preferred stock dividend series C <br>     (noncontrolling interest) — — — — — (38 ) (38 )
Balance, June 30, 2023 7,057,847 $ 8,823 $ 12,521 $ 39,012 $ (29,451 ) $ 10,655 $ 41,560
Balance, March 31, 2024 7,103,003 $ 8,879 $ 12,735 $ 44,347 $ (26,213 ) $ 10,655 $ 50,403
Net Income — — — 2,072 — 141 2,213
Repurchase of common stock (34,426 ) (43 ) (225 ) — — — (268 )
Other comprehensive loss — — — — (75 ) — (75 )
Record preferred stock dividend series B <br>     (noncontrolling interest) — — — — — (104 ) (104 )
Record preferred stock dividend series C <br>     (noncontrolling interest) — — — — — (37 ) (37 )
Balance, June 30, 2024 7,068,577 $ 8,836 $ 12,510 $ 46,419 $ (26,288 ) $ 10,655 $ 52,132
Number of<br>Common<br>Shares<br>Issued Common<br>Stock Additional<br>Paid-in<br>Capital Undivided<br>Profits Accumulated<br>Other<br>Comprehensive<br>Loss Noncontrolling<br>Interest Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands, except share data)
Balance, December 31, 2022 7,075,125 $ 8,844 $ 12,633 $ 37,030 $ (31,765 ) $ 10,655 $ 37,397
Cumulative effect of change in accounting principle — — — (1,915 ) — —
Net Income — — — 3,897 — 280 4,177
Repurchase of common stock (17,278 ) (21 ) (112 ) — — — (133 )
Other comprehensive income — — — — 2,314 — 2,314
Record preferred stock dividend Series B<br>   (noncontrolling interest) — — — — — (206 ) (206 )
Record preferred stock dividend Series C<br>   (noncontrolling interest) — — — — — (74 ) (74 )
Balance, June 30, 2023 7,057,847 $ 8,823 $ 12,521 $ 39,012 $ (29,451 ) $ 10,655 $ 41,560
Balance, December 31, 2023 7,124,438 $ 8,905 $ 12,876 $ 42,105 $ (25,100 ) $ 10,655 $ 49,441
Net Income — — — 4,314 — 282 4,596
Repurchase of common stock (55,861 ) (69 ) (366 ) — — — (435 )
Other comprehensive loss — — — — (1,188 ) — (1,188 )
Record preferred stock dividend Series B<br>   (noncontrolling interest) — — — — — (208 ) (208 )
Record preferred stock dividend Series C<br>   (noncontrolling interest) — — — — — (74 ) (74 )
Balance, June 30, 2024 7,068,577 $ 8,836 $ 12,510 $ 46,419 $ (26,288 ) $ 10,655 $ 52,132

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30,
2024 2023
(dollars in thousands)
Cash flows from operating activities
Net income $ 4,596 $ 4,177
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 537 552
Right of use asset amortization 192 187
Provision for credit losses 401 387
Loss on sale of securities available for sale — 42
Loss on call of securities held to maturity 148 —
Gain on sale of premises and equipment — (37 )
Gain on sale of mortgage loans (526 ) (285 )
Realized/unrealized gain on equity securities (22 ) (11 )
Net amortization of premium on investment securities available for sale 886 960
Net amortization of premium on investment securities held to maturity 66 71
Amortization of loan servicing assets 611 613
Originations and purchases of mortgage loans for sale (51,641 ) (38,413 )
Proceeds from sales of mortgage loans for sale 53,251 38,175
Mortgage banking derivatives (140 ) (694 )
Loan servicing assets (413 ) (297 )
Accrued interest receivable (295 ) (79 )
Prepaid assets (149 ) (714 )
Cash surrender value of life insurance (71 ) (69 )
Miscellaneous other assets (312 ) (222 )
Accrued interest payable 153 124
Miscellaneous other liabilities 631 591
Net cash provided by operating activities 7,903 5,058
Cash flows from investing activities
Proceeds from sale of investment securities available for sale — 11,329
Proceeds from maturities, calls and paydowns of securities available for sale 19,225 13,235
Proceeds from maturities, calls and paydowns of securities held to maturity 1,134 1,044
Purchase of investment securities available for sale (35,703 ) (22,350 )
Purchase of investments in other assets (350 ) (187 )
Proceeds from sale of investments in other assets 97 —
Net change in restricted stock (37 ) (40 )
Net increase in loans (44,725 ) (36,992 )
Purchase of premises and equipment (173 ) (1,172 )
Proceeds from sale of premises and equipment — 38
Net cash used by investing activities (60,532 ) (35,095 )
Cash flows from financing activities
Net increase in deposit accounts 42,362 10,414
Net increase (decrease) in federal funds purchased and other short-term borrowings 5,021 (112 )
Repayment of long-term borrowings — (580 )
Repurchase of common stock, net (435 ) (133 )
Dividends paid on preferred stock (noncontrolling interest) (282 ) (280 )
Net cash provided by financing activities 46,666 9,309
Decrease in cash and cash equivalents (5,963 ) (20,728 )
Cash and cash equivalents, beginning of period 63,434 114,581
Cash and cash equivalents, end of period $ 57,471 $ 93,853
Supplemental disclosures of cash flow information
Interest paid $ 8,430 $ 5,347
Income taxes paid 1,535 1,225
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax $ (1,188 ) $ 2,314
Loans transferred to foreclosed real estate — 142

See accompanying notes

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Uwharrie Bank (the “Bank”), Uwharrie Investment Advisors, Inc. (“UIA”), and Uwharrie Mortgage, Inc. The Bank consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly owned by the Bank.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of additional economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2023 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2024. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses.

Accounting Changes and Reclassifications

Certain amounts in the 2023 financial statements have been reclassified to conform to the 2024 presentation. The recovery of credit losses on unfunded loan commitments has been reclassified from other noninterest expense for periods prior to 2024. The reclassification is immaterial and did not have an impact on net income or shareholders’ equity.

Certain revisions have been made to previously issued financial statements for the year ended December 31, 2023 presented on Form 10-K. The carrying value and estimated fair value for securities held to maturity disclosed in Note 11 as of December 31, 2023 were revised due to an error in the calculation. These revisions did not change the securities reported in total assets and had no effect on net income.

We evaluated the effects of this error to our previously issued financial statements in accordance with SEC Staff Accounting Bulletin No. 99 and determined that the error was not material to the financial statements and disclosures previously reported on Form 10-K for the year ended December 31, 2023.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements for the year ended December 31, 2023 and are contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2023.

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. 7

The following table presents the changes in accumulated other comprehensive loss for the three and six months ended June 30, 2024 and 2023:

For the Six Months Ended June 30,
2023 2024 2023
Beginning balance (26,213 ) $ (27,219 ) $ (25,100 ) $ (31,765 )
Other comprehensive income (loss) before reclassifications,   net of 22, 664, 354 and (695) tax effect, respectively (75 ) (2,225 ) (1,188 ) 2,280
Amounts reclassified from accumulated other comprehensive loss,   net of 0, 2, 0, and (8) tax effect, respectively — (7 ) — 34
Net current-period other comprehensive income (loss) (75 ) (2,232 ) (1,188 ) 2,314
Ending balance (26,288 ) $ (29,451 ) $ (26,288 ) $ (29,451 )

All values are in US Dollars.

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

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 June 30, 2024 or December 31, 2023. The number of shares and earnings per share for the 2023 periods have been adjusted for the 2% stock dividend declared on October 17, 2023.

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 7,093,666 for the three-month period ended June 30, 2024 compared to 7,215,163 for the three-month period ended June 30, 2023. For the six-month period ended June 30, 2024, the weighted average number of common shares outstanding was 7,108,070 compared to 7,215,891 for the six-month period ended June 30, 2023.

Note 5 – Investment and Equity Securities

Carrying amounts and fair values of securities available for sale and held to maturity are summarized below:

June 30, 2024 Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
(dollars in thousands)
Securities available for sale:
U.S. Treasury $ 53,002 $ — $ 3,573 $ 49,429
U.S. government agencies 45,942 83 998 45,027
GSE - Mortgage-backed securities and CMOs 157,306 72 14,220 143,158
Asset-backed securities 27,562 422 38 27,946
State and political subdivisions 95,081 — 15,492 79,589
Corporate bonds 6,000 — 385 5,615
Total securities available for sale $ 384,893 $ 577 $ 34,706 $ 350,764

8

June 30, 2024 Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value Allowance for <br>Credit Losses Net Carrying<br>Amount
(dollars in thousands)
Securities held to maturity:
State and political subdivisions $ 12,252 $ — $ 1,015 $ 11,237 $ — $ 12,252
Corporate bonds 15,000 — 1,581 13,419 66 14,934
Total securities held to maturity $ 27,252 $ — $ 2,596 $ 24,656 $ 66 $ 27,186
December 31, 2023 Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities available for sale:
U.S. Treasury $ 54,984 $ — $ 3,479 $ 51,505
U.S. government agencies 43,921 66 969 43,018
GSE - Mortgage-backed securities and CMOs 137,346 170 13,729 123,787
Asset-backed securities 31,469 244 200 31,513
State and political subdivisions 95,581 15 14,196 81,400
Corporate bonds 6,000 — 509 5,491
Total securities available for sale $ 369,301 $ 495 $ 33,082 $ 336,714
December 31, 2023 Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value Allowance for <br>Credit Losses Net Carrying<br>Amount
--- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities held to maturity:
U.S. government agencies $ 133 $ — $ 1 $ 132 $ — $ 133
State and political subdivisions 13,467 — 985 12,482 — 13,467
Corporate bonds 15,000 — 1,878 13,122 56 14,944
Total securities held to maturity $ 28,600 $ — $ 2,864 $ 25,736 $ 56 $ 28,544

The Company owned Federal Reserve Bank (FRB) stock reported at cost of $959,000 at June 30, 2024 and December 31, 2023. The Company owned Federal Home Loan Bank (FHLB) stock reported at cost of $750,000 and $712,000 at June 30, 2024 and December 31, 2023, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and are classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2024.

There is no allowance for credit losses on available for sale securities. The following table shows a rollforward of the allowance for credit losses on held to maturity securities for the six months ended June 30, 2024.

State and political subdivisions Corporate bonds Total
(dollars in thousands)
Balance, December 31, 2023 $ — $ 56 $ 56
Provision for credit losses — 10 10
Charge-offs of securities — — —
Recoveries — — —
Balance, June 30, 2024 $ — $ 66 $ 66

On a quarterly basis, the Company monitors the credit quality of the debt securities held to maturity through the use of credit ratings. For unrated securities, primarily corporate bonds consisting of subordinated debt of bank holding companies, individual financial reports are reviewed quarterly. Capital, profitability, liquidity and other ratios are reviewed to assist in determining credit quality. 9

The following table summarizes the credit ratings of debt securities held to maturity, presented at amortized cost, by major security type at June 30, 2024.

June 30, 2024 State and political subdivisions Corporate bonds Total
(dollars in thousands)
Aaa $ — $ — $ —
Aa1/Aa2/Aa3 12,252 — 12,252
A1/A2 — — —
BBB — — —
Not rated — 15,000 15,000
Total $ 12,252 $ 15,000 $ 27,252

At June 30, 2024, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the six months ended June 30, 2024.

Results from sales of securities available for sale for the three and six-month periods ended June 30, 2024 and 2023, respectively, were as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(dollars in thousands)
Gross proceeds from sales $ — $ 4,536 $ — $ 11,329
Realized gains from sales $ — $ 48 $ — $ 54
Realized losses from sales — 39 — 96
Net realized gains (losses) $ — $ 9 $ — $ (42 )

At June 30, 2024 and December 31, 2023, securities available for sale with a carrying amount of $142.3 million and $137.1 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. At June 30, 2024, securities available for sale with a carrying amount of $6.7 million were pledged as collateral on a borrowing established with the FRB in January 2024. More information regarding short-term borrowings can be found in Note 14 (Short-Term Borrowed Funds) to the Company's Notes to Consolidated Financial Statements.

We believe the unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments.

The following tables show the gross unrealized losses and estimated fair value of available for sale securities, for which an allowance has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2024 and December 31, 2023.

Less than 12 Months 12 Months or More Total
June 30, 2024 Number of Securities Fair Value Unrealized<br>Losses Number of Securities Fair Value Unrealized<br>Losses Fair Value Unrealized<br>Losses
(dollars in thousands)
Securities available for sale:
U.S. Treasury — $ — $ — 8 $ 49,429 $ 3,573 $ 49,429 $ 3,573
U.S. government agencies 7 10,022 172 22 20,349 826 30,371 998
GSE-Mortgage-backed securities and CMOs 18 31,767 263 60 98,403 13,957 130,170 14,220
Asset-backed securities 2 2,091 3 5 6,766 35 8,857 38
State and political subdivisions 2 3,314 25 61 76,064 15,467 79,378 15,492
Corporate bonds — — — 3 5,615 385 5,615 385
Total securities available for sale 29 $ 47,194 $ 463 159 $ 256,626 $ 34,243 $ 303,820 $ 34,706

10

Less than 12 Months 12 Months or More Total
December 31, 2023 Number of Securities Fair Value Unrealized<br> Losses Number of Securities Fair Value Unrealized<br>Losses Fair Value Unrealized<br>Losses
(dollars in thousands)
Securities available for sale
U.S. Treasury — $ — $ — 9 $ 51,505 $ 3,479 $ 51,505 $ 3,479
U.S. government agencies 12 16,865 107 18 14,705 862 31,570 969
GSE-Mortgage-backed securities and CMOs 5 7,907 103 59 100,765 13,626 108,672 13,729
Asset-backed securities 2 1,711 5 7 10,140 195 11,851 200
State and political subdivisions 2 2,496 23 60 76,352 14,173 78,848 14,196
Corporate bonds — — — 3 5,491 509 5,491 509
Total securities available for sale 21 $ 28,979 $ 238 156 $ 258,958 $ 32,844 $ 287,937 $ 33,082

Declines in the fair value of the available for sale investment portfolio are believed by management to be temporary in nature. When evaluating an investment for credit loss, management considers, among other things, the extent to which the fair value has been in a loss position; the financial condition of the issuer through the review of credit ratings and, if necessary, corporate financial statements; adverse conditions specifically related to the security such as past due principal or interest; underlying assets that collateralize the debt security; other economic conditions and demographics; and the intent and ability of the Company to hold the investment until the loss position is recovered. Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. At June 30, 2024, the Company did not intend to sell and believed it was 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 June 30, 2024:

June 30, 2024
Amortized<br>Cost Estimated<br>Fair Value Book<br>Yield
(dollars in thousands)
Securities available for sale:
Due within twelve months 27,750 27,531 3.76 %
Due after one but within five years 54,232 48,838 2.01 %
Due after five but within ten years 61,590 53,919 2.59 %
Due after ten years 241,321 220,476 3.89 %
$ 384,893 $ 350,764 3.41 %
June 30, 2024
--- --- --- --- --- --- --- ---
Amortized<br>Cost Estimated<br>Fair Value Book<br>Yield
(dollars in thousands)
Securities held to maturity:
Due within twelve months 380 380 2.98 %
Due after five but within ten years 17,661 15,842 4.29 %
Due after ten years 9,211 8,434 3.41 %
$ 27,252 $ 24,656 3.97 %

The portion of unrealized gains and losses for the three and six months ended June 30, 2024 and 2023 related to equity securities still held at the reporting date is calculated as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(dollars in thousands)
Gross proceeds from sales $ — $ — $ — $ —
Net gains (losses) recognized during the period on equity securities $ (19 ) $ (23 ) $ 22 $ 11
Less: Net gains (losses) recognized from equity securities sold during the period — — — —
Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date $ (19 ) $ (23 ) $ 22 $ 11

11

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2024 and December 31, 2023 was as follows:

June 30, 2024 December 31, 2023
(dollars in thousands)
Commercial
Commercial $ 102,616 $ 102,366
Real estate - commercial 235,897 213,397
Other real estate construction loans 44,032 40,872
Other loans 5,971 6,214
Noncommercial
Real estate 1-4 family construction 18,987 12,481
Real estate - residential 152,813 143,697
Home equity 64,344 60,599
Consumer loans 11,268 11,581
635,928 591,207
Less:
Allowance for credit losses (5,908 ) (5,561 )
Deferred loan costs net 810 864
Loans held for investment, net $ 630,830 $ 586,510

Note 7 – Allowance for Credit Losses on Loans

The following tables summarize the activity related to the allowance for credit losses on loans for the three and six months ended June 30, 2024 and 2023.

Commercial Loans Noncommercial Loans
Commercial Real estate <br>commercial Other<br>real estate<br>construction Other<br>loans Real estate<br>1-4 family<br>construction Real estate<br>residential Home<br>equity Consumer Total
(dollars in thousands)
Balance, March 31, 2024 $ 1,480 $ 2,033 $ 323 $ 11 $ 34 $ 855 $ 600 $ 187 $ 5,523
Provision for (recovery of) credit losses (63 ) 175 45 (1 ) 8 107 69 70 410
Charge-offs (17 ) — — — — — (1 ) (73 ) (91 )
Recoveries 54 — — — — — 1 11 66
Net (charge-offs) recoveries 37 — — — — — — (62 ) (25 )
Balance, June 30, 2024 $ 1,454 $ 2,208 $ 368 $ 10 $ 42 $ 962 $ 669 $ 195 $ 5,908
Commercial Loans Noncommercial Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial Real estate <br>commercial Other<br>real estate<br>construction Other<br>loans Real estate<br>1-4 family<br>construction Real estate<br>residential Home<br>equity Consumer Total
(dollars in thousands)
Balance, March 31, 2023 $ 1,010 $ 1,860 $ 325 $ 7 $ — $ 657 $ 567 $ 170 $ 4,596
Provision for (recovery of) credit losses 11 20 31 — 23 9 7 — 101
Charge-offs (1 ) — — — — — — (22 ) (23 )
Recoveries 8 — — — — — 7 24 39
Net (charge-offs) recoveries 7 — — — — — 7 2 16
Balance, June 30, 2023 $ 1,028 $ 1,880 $ 356 $ 7 $ 23 $ 666 $ 581 $ 172 $ 4,713

12

Commercial Loans Noncommercial Loans
Commercial Real estate<br>commercial Other<br>real estate<br>construction Other<br>loans Real estate<br>1-4 family<br>construction Real estate<br>residential Home<br>equity Consumer Total
(dollars in thousands)
Balance, December 31, 2023 $ 1,493 $ 2,057 $ 389 $ 9 $ 31 $ 796 $ 582 $ 204 $ 5,561
Provision for (recovery of) credit losses (79 ) 151 (21 ) 1 11 165 87 90 405
Charge-offs (17 ) — — — — — (1 ) (118 ) (136 )
Recoveries 57 — — — — 1 1 19 78
Net (charge-offs) recoveries 40 — — — — 1 — (99 ) (58 )
Balance, June 30, 2024 $ 1,454 $ 2,208 $ 368 $ 10 $ 42 $ 962 $ 669 $ 195 $ 5,908
Commercial Loans Noncommercial Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial Real estate<br>commercial Other<br>real estate<br>construction Other<br>loans Real estate<br>1-4 family<br>construction Real estate<br>residential Home<br>equity Consumer Total
(dollars in thousands)
Balance, December 31, 2022 $ 435 $ 760 $ 177 $ 4 $ — $ 561 $ 277 $ 76 $ 2,290
Cumulative effect of change in accounting principle 702 1,017 143 5 — 74 375 91 2,407
Provision for (recovery of) credit losses 224 103 78 (2 ) 23 30 (79 ) 15 392
Charge-offs (344 ) — (42 ) — — — — (58 ) (444 )
Recoveries 11 — — — — 1 8 48 68
Net (charge-offs) recoveries (333 ) — (42 ) — — 1 8 (10 ) (376 )
Balance, June 30, 2023 $ 1,028 $ 1,880 $ 356 $ 7 $ 23 $ 666 $ 581 $ 172 $ 4,713

Past due loan information is used by management when assessing the adequacy of the allowance for credit losses. The following tables summarize the past due information of the loan portfolio by class as of the dates indicated:

June 30, 2024 Loans<br>30-89 Days<br>Past Due Nonaccrual Loans Total Past<br>Due Loans Current<br>Loans Total<br>Loans Accruing Loans 90 Days or More Past Due
(dollars in thousands)
Commercial $ 41 $ 147 $ 188 $ 102,425 $ 102,613 $ —
Real estate - commercial — 401 401 235,615 236,016 —
Other real estate construction — — — 44,032 44,032 —
Real estate 1-4 family construction — — — 18,987 18,987 —
Real estate - residential 779 818 1,597 151,910 153,507 —
Home equity 151 222 373 63,971 64,344 —
Consumer loans 73 — 73 11,195 11,268 —
Other loans — — — 5,971 5,971 —
Total $ 1,044 $ 1,588 $ 2,632 $ 634,106 $ 636,738 $ —
December 31, 2023 Loans<br>30-89 Days<br>Past Due Nonaccrual Loans Total Past<br>Due Loans Current<br>Loans Total<br>Loans Accruing Loans 90 Days or More Past Due
--- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands)
Commercial $ 46 $ 154 $ 200 $ 102,162 $ 102,362 $ —
Real estate - commercial 588 488 1,076 212,447 213,523 —
Other real estate construction — — — 40,872 40,872 —
Real estate 1-4 family construction — — — 12,481 12,481 —
Real estate - residential 715 278 993 143,445 144,438 —
Home equity 115 181 296 60,304 60,600 —
Consumer loan 84 — 84 11,497 11,581 —
Other loans — — — 6,214 6,214 —
Total $ 1,548 $ 1,101 $ 2,649 $ 589,422 $ 592,071 $ —

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing status 90 days or more until they are paid current or charged off. 13

The carrying value of foreclosed properties held as other real estate was $141,000 at June 30, 2024 and December 31, 2023. The Company had no foreclosed residential real estate and $225,000 of residential real estate in process of foreclosure at June 30, 2024. At December 31, 2023, the Company had no foreclosed residential real estate and no residential real estate in process of foreclosure.

The composition of nonaccrual loans by class as of June 30, 2024 and December 31, 2023 was as follows:

Six Months Ended
June 30, 2024 June 30, 2024
Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Interest Income
(dollars in thousands)
Commercial $ — $ 147 $ 147 $ —
Real estate - commercial 401 — 401 —
Other real estate construction — — — —
Real estate 1-4 family construction — — — —
Real estate - residential 176 642 818 17
Home equity — 222 222 2
Consumer loans — — — —
Other loans — — — —
$ 577 $ 1,011 $ 1,588 $ 19
Six Months Ended
--- --- --- --- --- --- --- --- ---
December 31, 2023 June 30, 2023
Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Interest Income
(dollars in thousands)
Commercial $ — $ 154 $ 154 $ —
Real estate - commercial 400 88 488 —
Other real estate construction — — — —
Real estate 1-4 family construction — — — —
Real estate - residential 181 97 278 7
Home equity — 181 181 —
Consumer loans — — — —
Other loans — — — —
$ 581 $ 520 $ 1,101 $ 7

A loan may be individually assessed for determining the allowance for credit losses when it is determined that it does not share similar risk characteristics with other assets. Loans that are on nonaccrual status will be reviewed to determine if they will be individually, rather than collectively, assessed. If the loan is deemed to be collateral dependent and the relationship’s outstanding balance is $100,000 or greater, it will be individually assessed. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans require an analysis of the collateral. The fair value of the collateral is discounted by liquidation costs. If the discounted fair value of the collateral is greater than the amortized loan balance, no allowance is required. Otherwise the difference between the balance and the collateral is charged off if deemed uncollectible.

The following table details the amortized cost of collateral dependent loans and any related allowance at June 30, 2024 and December 31, 2023.

June 30, 2024 December 31, 2023
Amortized Cost Allowance for<br>Credit Losses Amortized Cost Allowance for<br>Credit Losses
(dollars in thousands)
Commercial $ 141 $ 49 $ 147 $ 95
Real estate - commercial 401 — 400 —
Other real estate construction — — — —
Real estate 1-4 family construction — — — —
Real estate - residential 726 107 172 —
Home equity 132 8 133 3
Consumer loans — — — —
Other loans — — — —
Total $ 1,400 $ 164 $ 852 $ 98

14

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for credit losses on loans. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration. The program has nine risk grades summarized in six categories as follows:

Pass: Loans that are pass grade credits include loans that are fundamentally sound, with risk factors that are reasonable and acceptable. They generally conform to policy with only minor exceptions; any major exceptions are clearly mitigated by other economic factors.

Watch: Loans that are acceptable but show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans may deserve management’s attention.

Special Mention: Loans that exhibit potential weakness that deserves management’s close attention. Credits within this category exhibit risk that is increasing beyond the point where the loan would have been originally approved.

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

Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.

Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted. 15

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of June 30, 2024:

June 30, 2024 Term Loans by Year of Origination
2024 2023 2022 2021 2020 Prior Revolving Total
(dollars in thousands)
Commercial
Pass $ 13,522 $ 20,740 $ 16,026 $ 12,866 $ 4,112 $ 11,345 $ 22,700 $ 101,311
Watch — 168 515 73 — — 382 1,138
Special Mention — 16 — — — — — 16
Substandard — — — — 148 — — 148
Total commercial 13,522 20,924 16,541 12,939 4,260 11,345 23,082 102,613
Real estate - commercial
Pass 21,050 55,394 49,529 37,510 21,930 45,680 3,453 234,546
Watch — — — — — 69 — 69
Special Mention — — — 571 117 312 — 1,000
Substandard — — — 401 — — — 401
Total real estate - commercial 21,050 55,394 49,529 38,482 22,047 46,061 3,453 236,016
Other real estate construction
Pass 13,185 15,890 5,352 2,704 3,311 2,443 1,102 43,987
Watch — — — — — 45 — 45
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total other real estate construction 13,185 15,890 5,352 2,704 3,311 2,488 1,102 44,032
Real estate 1-4 family construction
Pass 5,812 13,175 — — — — — 18,987
Watch — — — — — — — —
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total real estate 1-4 family construction 5,812 13,175 — — — — — 18,987
Real estate - residential
Pass 23,979 38,469 36,888 22,449 10,778 16,241 1,171 149,975
Watch 504 — — 208 375 714 — 1,801
Special Mention — 106 — 493 — 314 — 913
Substandard — 555 — — 191 72 — 818
Total real estate - residential 24,483 39,130 36,888 23,150 11,344 17,341 1,171 153,507
Home equity
Pass 23 134 287 44 405 1,236 61,629 63,758
Watch — — — 109 — 84 150 343
Special Mention — — — — — 21 — 21
Substandard — — — — — 222 — 222
Total home equity 23 134 287 153 405 1,563 61,779 64,344
Consumer loans
Pass 4,946 2,940 1,440 310 85 394 1,128 11,243
Watch — — — — — — — —
Special Mention — 25 — — — — — 25
Substandard — — — — — — — —
Total consumer loans 4,946 2,965 1,440 310 85 394 1,128 11,268
Other loans
Pass — — 1,602 2,725 1,254 390 — 5,971
Watch — — — — — — — —
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total other loans — — 1,602 2,725 1,254 390 — 5,971
Total Pass 82,517 146,742 111,124 78,608 41,875 77,729 91,183 629,778
Total Watch 504 168 515 390 375 912 532 3,396
Total Special Mention — 147 — 1,064 117 647 — 1,975
Total Substandard — 555 — 401 339 294 — 1,589
Total loans $ 83,021 $ 147,612 $ 111,639 $ 80,463 $ 42,706 $ 79,582 $ 91,715 $ 636,738

During the six months ended June 30, 2024, sixty-eight loans totaling $1.5 million were converted from revolving to term loans. 16

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:

December 31, 2023 Term Loans by Year of Origination
2023 2022 2021 2020 2019 Prior Revolving Total
(dollars in thousands)
Commercial
Pass $ 23,611 $ 21,731 $ 16,587 $ 5,868 $ 2,553 $ 10,634 $ 20,089 $ 101,073
Watch 183 22 — — — — 914 1,119
Special Mention 16 — — — — — — 16
Substandard — — — 154 — — — 154
Total commercial 23,810 21,753 16,587 6,022 2,553 10,634 21,003 102,362
Real estate - commercial
Pass 51,543 46,563 38,267 23,031 15,727 33,949 2,844 211,924
Watch — — — — 74 — — 74
Special Mention — — 588 121 171 157 — 1,037
Substandard — — 400 88 — — — 488
Total real estate - commercial 51,543 46,563 39,255 23,240 15,972 34,106 2,844 213,523
Other real estate construction
Pass 20,458 10,368 3,050 3,711 542 2,148 548 40,825
Watch — — — — — 47 — 47
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total other real estate construction 20,458 10,368 3,050 3,711 542 2,195 548 40,872
Real estate 1-4 family construction
Pass 10,628 1,353 500 — — — — 12,481
Watch — — — — — — — —
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total real estate 1-4 family construction 10,628 1,353 500 — — — — 12,481
Real estate - residential
Pass 46,470 40,558 23,259 11,182 3,528 15,208 1,082 141,287
Watch — — 209 384 122 669 — 1,384
Special Mention 666 — 501 — — 322 — 1,489
Substandard — — — 196 — 82 — 278
Total real estate - residential 47,136 40,558 23,969 11,762 3,650 16,281 1,082 144,438
Home equity
Pass 173 134 95 407 94 1,309 57,800 60,012
Watch — — 109 — 19 130 149 407
Special Mention — — — — — — — —
Substandard — — — — — 181 — 181
Total home equity 173 134 204 407 113 1,620 57,949 60,600
Consumer loans
Pass 4,302 2,089 609 121 129 352 3,936 11,538
Watch — — — — — — — —
Special Mention 25 18 — — — — — 43
Substandard — — — — — — — —
Total consumer loans 4,327 2,107 609 121 129 352 3,936 11,581
Other loans
Pass 5 1,611 2,864 1,306 — 428 — 6,214
Watch — — — — — — — —
Special Mention — — — — — — — —
Substandard — — — — — — — —
Total other loans 5 1,611 2,864 1,306 — 428 — 6,214
Total Pass 157,190 124,407 85,231 45,626 22,573 64,028 86,299 585,354
Total Watch 183 22 318 384 215 846 1,063 3,031
Total Special Mention 707 18 1,089 121 171 479 — 2,585
Total Substandard — — 400 438 — 263 — 1,101
Total loans $ 158,080 $ 124,447 $ 87,038 $ 46,569 $ 22,959 $ 65,616 $ 87,362 $ 592,071

17

The following tables present gross charge-offs by origination date for the six months ended June 30, 2024 and for the year ended December 31, 2023:

June 30, 2024 Gross Loan Charge-offs by Year of Origination
2024 2023 2022 2021 2020 Prior Revolving Total
(dollars in thousands)
Commercial
Commercial $ — $ — $ — $ — $ 17 $ — $ — $ 17
Real estate - commercial — — — — — — — —
Other real estate construction — — — — — — — —
Other loans — — — — — — — —
Noncommercial
Real estate 1-4 family construction — — — — — — — —
Real estate - residential — — — — — — — —
Home equity — — — — — — — —
Consumer loans — 51 3 10 6 2 47 119
Total charge-offs $ — $ 51 $ 3 $ 10 $ 23 $ 2 $ 47 $ 136
December 31, 2023 Gross Loan Charge-offs by Year of Origination
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2023 2022 2021 2020 2019 Prior Revolving Total
(dollars in thousands)
Commercial
Commercial $ — $ 49 $ — $ 159 $ 315 $ 71 $ 9 $ 603
Real estate - commercial — — — — — — — —
Other real estate construction — 42 — — — — — 42
Other loans — — — — — — — —
Noncommercial
Real estate 1-4 family construction — — — — — — — —
Real estate - residential — — — — — — — —
Home equity — — — — — — — —
Consumer loans — 34 4 3 — 4 64 109
Total charge-offs $ — $ 125 $ 4 $ 162 $ 315 $ 75 $ 73 $ 754

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2024 and December 31, 2023 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 June 30, 2024 and December 31, 2023:

June 30, 2024 Performing Non-<br>Performing Total
(dollars in thousands)
Commercial $ 102,466 $ 147 $ 102,613
Real estate - commercial 235,615 401 236,016
Other real estate construction 44,032 — 44,032
Real estate 1-4 family construction 18,987 — 18,987
Real estate - residential 152,689 818 153,507
Home equity 64,122 222 64,344
Consumer loans 11,268 — 11,268
Other loans 5,971 — 5,971
Total $ 635,150 $ 1,588 $ 636,738
December 31, 2023 Performing Non-<br>Performing Total
--- --- --- --- --- --- ---
(dollars in thousands)
Commercial $ 102,208 $ 154 $ 102,362
Real estate - commercial 213,035 488 213,523
Other real estate construction 40,872 — 40,872
Real estate 1-4 family construction 12,481 — 12,481
Real estate - residential 144,160 278 144,438
Home equity 60,419 181 60,600
Consumer loans 11,581 — 11,581
Other loans 6,214 — 6,214
Total $ 590,970 $ 1,101 $ 592,071

Modifications to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses due to the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. The Company rarely modifies loans by providing principal forgiveness. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a loan by providing multiple types of concessions. Typically one type of concession is granted initially. If the borrower continues to experience financial difficulty, another concession may be granted. Types of concessions include term extensions beyond customary terms, capitalization of accrued interest, interest rate reductions to below current market rates, payment deferrals or principal forgiveness.

There were no loans modified for borrowers experiencing financial difficulty during the six months ended June 30, 2024. The following table shows the amortized cost basis of loans modified for borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted, during the twelve months ended December 31, 2023.

Payment Deferrals
Amortized % of Total
Cost Basis Loan Type Financial Effect
(dollars in thousands)
Real estate - residential $ 560 0.37 % Provided additional payment deferral to borrowers in the form of interest-only payments
Total $ 560

The Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the twelve months ended December 31, 2023 that subsequently defaulted. A default on a modified loan is defined as being past due 90 days or being out of compliance with the modification agreement. The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that were modified during the twelve-month period ended December 31, 2023:

Payment Status (Amortized Cost Basis)
30-89 Days 90+ Days
Current Past Due Past Due
(dollars in thousands)
Real estate - residential $ 560 $ — $ —
Total $ 560 $ — $ —

Note 8 - Leases

Operating leases in which we are the lessee are recorded as operating lease right of use (“ROU”) assets and operating lease liabilities, included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for any lease incentives. Operating lease expense, which is composed of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in the net occupancy expense in the consolidated statements of income. We do not currently have any finance leases in which we are the lessee. 19

Our leases relate to four office locations, three of which are branch locations, with remaining terms of two to five 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 June 30, 2024, operating lease ROU assets were $1.3 million and the operating lease liability was $1.4 million, compared to operating lease ROU assets of $1.7 million and an operating lease liability of $1.8 million at June 30, 2023. Lease costs associated with all leases was $106,000 and $212,000 for the three and six months ended June 30, 2024, respectively.

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

Six Months Ended June 30,
2024 2023
(in thousands except percent and period data)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 221 $ 216
Right-of-use assets obtained in exchange for new operating lease liabilities — —
Weighted-average remaining lease term - operating leases, in years 3.5 4.4
Weighted-average discount rate - operating leases 2.61 % 2.56 %

The table below summarizes the maturity of remaining lease liabilities:

June 30, 2024
(dollars in thousands)
2024 $ 224
2025 455
2026 416
2027 260
2028 97
2029 and thereafter 20
Total lease payments 1,472
Less: Interest (70 )
Present value of lease liabilities 1,402

Note 9 - 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 June 30, 2024 and December 31, 2023, outstanding financial instruments whose contract amounts represent credit risk were approximately:

June 30, 2024 December 31, 2023
(dollars in thousands)
Commitments to extend credit $ 219,195 $ 204,163
Credit card commitments 25,975 25,647
Standby letters of credit 8,126 7,878
Total commitments $ 253,296 $ 237,688

20

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancelable. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $170,000 and $184,000 at June 30, 2024 and December 31, 2023, respectively, is separately classified on the balance sheet within Other Liabilities.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the six months ended June 30, 2024.

Total Allowance for Credit Losses - <br>Unfunded Loan Commitments
(dollars in thousands)
Balance, December 31, 2023 $ 184
Recovery of credit losses (14 )
Balance, June 30, 2024 $ 170

Note 10 – Fair Value Disclosures

Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale and mortgage banking derivatives are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, individually evaluated loans, loans held for sale, which are carried at the lower of cost or market, and loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for U.S. Treasury and marketable equity securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the Level 1 input column. Prices for government agency securities, mortgage-backed securities, asset-backed securities and state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the Level 2 input column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the Level 3 input column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

Mortgage banking derivatives, which are composed of interest rate lock commitments, or IRLCs, mortgage forward sales commitments and to-be-announced mortgage-backed securities trades (TBAs), are recorded at fair value on a recurring basis. Fair value of the IRLCs is based on projected pull-through rates and anticipated margins based on changes in market interest rates. The Company considers these to be Level 3 valuations. The fair value of mortgage forward sales commitments and TBAs is based on the gain or loss that would occur if the Company were to pair-off the transaction at the measurement date and is considered to be a Level 2 input. 21

The Company does not record loans at fair value on a recurring basis. However, certain nonaccrual loans are individually evaluated in connection with determining the allowance for credit losses. If the loan is deemed to be collateral dependent and the relationship’s outstanding balance is $100,000 or greater, it will be individually evaluated. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans require an analysis of the collateral. The fair value of the collateral is based on appraised values discounted by liquidation costs 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.

The following tables provide fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023:

June 30, 2024
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Treasury $ 49,429 $ 49,429 $ — $ —
U.S. government agencies 45,027 — 45,027 —
GSE - Mortgage-backed securities and CMOs 143,158 — 143,158 —
Asset-backed securities 27,946 — 27,946 —
State and political subdivisions 79,589 — 79,589 —
Corporate bonds 5,615 — 5,615 —
Equity securities 324 324 — —
Mortgage banking derivatives 798 — 40 758
Total assets at fair value on a recurring basis $ 351,886 $ 49,753 $ 301,375 $ 758
Mortgage banking derivatives $ 94 $ — $ 94 $ —
Total liabilities at fair value on a recurring basis $ 94 $ — $ 94 $ —
December 31, 2023
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Treasury $ 51,505 $ 51,505 $ — $ —
U.S. government agencies 43,018 — 43,018 —
GSE - Mortgage-backed securities and CMOs 123,787 — 123,787 —
Asset-backed securities 31,513 — 31,513 —
State and political subdivisions 81,400 — 81,400 —
Corporate bonds 5,491 — 5,491 —
Equity securities 302 302 — —
Mortgage banking derivatives 852 — 46 806
Total assets at fair value on a recurring basis $ 337,868 $ 51,807 $ 285,255 $ 806
Mortgage banking derivatives $ 288 $ — $ 288 $ —
Total liabilities at fair value on a recurring basis $ 288 $ — $ 288 $ —

22

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

June 30, 2024
Mortgage banking derivatives:<br>Interest rate lock commitments Total
(dollars in thousands)
Balance at December 31, 2023 $ 806 $ 806
Change in fair value:
Included in income from mortgage banking (48 ) (48 )
Included in accumulated other comprehensive income (loss) — —
Change in observability of significant inputs:
Included in income from mortgage banking — —
Included in accumulated other comprehensive income (loss) — —
Balance at June 30, 2024 $ 758 $ 758

The fair value of mortgage IRLCs at June 30, 2024 was calculated based on a notional amount of $23.6 million. Significant unobservable inputs are used to determine the fair value of these derivatives. At June 30, 2024, such inputs included anticipated margins to be earned based on market movement from the original lock date and an overall projected pull-through rate of 87.0% determined by loan product, loan stage, and loan purpose. The fair value of mortgage IRLCs at December 31, 2023 was calculated based on a notional amount of $21.8 million. Significant unobservable inputs were the same as those used for the six months ended June 30, 2024 and assumed a projected pull-through rate of 82.7% at December 31, 2023. 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 June 30, 2024 and December 31, 2023:

June 30, 2024
(dollars in thousands)
Total Level 1 Level 2 Level 3
Individually evaluated loans $ 671 $ — $ — $ 671
Total assets at fair value on a nonrecurring basis $ 671 $ — $ — $ 671
December 31, 2023
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Individually evaluated loans $ 187 $ — $ — $ 187
Total assets at fair value on a nonrecurring basis $ 187 $ — $ — $ 187

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2024
Valuation Technique Unobservable Input General<br>Range
Nonrecurring measurements:
Individually evaluated loans Discounted appraisals Collateral discounts and estimated costs to sell 0 - 25%
December 31, 2023
--- --- --- ---
Valuation Technique Unobservable Input General<br>Range
Nonrecurring measurements:
Individually evaluated loans Discounted appraisals Collateral discounts and estimated costs to sell 0 - 25%

At June 30, 2024, individually evaluated loans were being evaluated with discounted appraisals for individually evaluated nonaccrual loans deemed collateral dependent.

Note 11 – Fair Values of Financial Instruments

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at June 30, 2024 and December 31, 2023 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 tables reflect a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2024 and December 31, 2023:

June 30, 2024 Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 57,471 $ 57,471 $ 57,471 $ — $ —
Securities available for sale 350,764 350,764 49,429 301,335 —
Securities held to maturity 27,186 24,656 — 11,237 13,419
Equity securities 324 324 324 — —
Loans held for investment, net 630,830 589,574 — — 589,574
Loans held for sale 3,611 3,611 — 3,611 —
Restricted stock 1,709 1,709 1,709 — —
Loan servicing assets 4,089 7,272 — 7,272 —
Mortgage banking derivatives 798 798 — 40 758
Accrued interest receivable 4,688 4,688 — — 4,688
FINANCIAL LIABILITIES
Deposits $ 1,024,075 1,022,794 — 1,022,794 —
Short-term borrowings 6,400 6,400 — 6,400 —
Long-term borrowings 29,123 25,470 — — 25,470
Mortgage banking derivatives 94 94 — 94 —
Accrued interest payable 567 567 — — 567
December 31, 2023 Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
--- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 63,434 $ 63,434 $ 63,434 $ — $ —
Securities available for sale 336,714 336,714 51,505 285,209 —
Securities held to maturity 28,544 25,736 — 12,614 13,122
Equity securities 302 302 302 — —
Loans held for investment, net 586,510 544,985 — — 544,985
Loans held for sale 4,695 4,695 — 4,695 —
Restricted stock 1,672 1,672 1,672 — —
Loan servicing assets 4,287 7,030 — 7,030 —
Mortgage banking derivatives 852 852 — 46 806
Accrued interest receivable 4,393 4,393 — — 4,393
FINANCIAL LIABILITIES
Deposits $ 981,713 $ 980,534 $ — $ 980,534 $ —
Short-term borrowings 1,379 1,379 — 1,379 —
Long-term borrowings 29,104 25,102 — — 25,102
Mortgage banking derivatives 288 288 — 288 —
Accrued interest payable 414 414 — — 414

At June 30, 2024 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 9 (Commitments and Contingencies) to the Company's Notes to Consolidated Financial Statements.

Note 12 – Recent Accounting Pronouncements and Other Changes

ASC 848, “Reference Rate Reform,” was set forth to eliminate certain reference rates and introduce new reference rates that are based on a larger, more liquid population of observable transactions that are less vulnerable to manipulation. The reference rate reform discontinues the use of certain widely used reference rates such as the London Interbank Offered Rate, or LIBOR. In response to likely challenges arising from contract modifications due to reference rate reform, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” in March 2020 to provide optional expedients and exceptions for applying GAAP to contract modifications. As such, modifications to debt contracts may be accounted for as a continuation of the existing contract by prospectively adjusting the effective interest rate. This amendment could be applied beginning March 12, 2020 through a sunset date of December 31, 2022. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” These amendments extend the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief provided in Topic 848 covers the period of time during which a significant number of modifications may take place, ASU 2022-06 defers the sunset date from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. ASU 2022-06 was effective upon issuance. The Company no longer holds or issues loan contracts that reference LIBOR. As of July 1, 2023, all loan contracts that previously referenced LIBOR had been modified. The Company does not anticipate a material financial impact as a result of these modifications.

ASU 2023-01 “Leases (Topic 842) – Common Control Arrangements” requires entities to determine whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with a related party (on the basis of legally enforceable terms and conditions). ASU 2023-01 was effective January 1, 2024 and did not have a material impact on our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments apply to all public entities that are required to report segment information in accordance with FASB ASC Topic 280, Segment Reporting. The amendments in the ASU are intended to improve disclosures about a public entity's reportable segments through enhanced disclosures about a segment's expenses. The amendments require, on an interim and annual basis, disclosures of significant expenses and other segment items that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, as well as any other key measure of performance used for segment management decisions. The amendments require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses key profitability measures in assessing segment performance and deciding how to allocate resources. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the potential impacts related to the adoption of the ASU.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which enhances income tax disclosure requirements. Under the new guidance, entities must disclose additional information in specified categories for federal, state and foreign income taxes with respect to the reconciliation of the effective tax rate to the statutory rate (rate reconciliation). Greater detail is also required about individual reconciling items in the rate reconciliation to the extent the impact of those items exceeds a specified threshold. Additionally, the amendments require that entities must disaggregate income taxes paid, net of refunds received, for federal, state and foreign taxes and further disaggregate for specific jurisdictions to the extent the related amounts exceed a quantitative threshold. The quantitative threshold is equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. Public business entities must apply the guidance to annual periods beginning after December 15, 2024. ASU 2023-09 is effective for the Company on January 1, 2025, though early adoption is permitted. Entities may apply the amendments prospectively or may elect retrospective application. The Company is currently evaluating the potential impacts related to the adoption of this ASU.

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 13 – Mortgage Banking Derivatives

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, otherwise known as Interest Rate Lock Commitments (IRLCs). IRLCs on mortgage loans that will be held for resale are considered to be derivatives and must be accounted for at fair value on the balance sheet. Accordingly, such commitments are recorded at fair value in the mortgage banking derivatives asset or liability with changes in fair value recorded in income from mortgage banking within the consolidated statement of income. Fair value is based on anticipated margins determined by market movement from the original lock date and projected pull-through rates on each loan by loan product, loan stage, and loan purpose.

During the term of the IRLC, the Company is exposed to the risk that the interest rate will change from the rate quoted to the borrower. In an effort to mitigate interest rate risk, the Company also enters into mortgage forward sales commitments on a mandatory basis for future delivery of residential mortgage loans after an interest rate lock is committed to the borrower. Mandatory commitments require that the loan must be delivered to the investor or a pair-off fee be paid. These forward commitments are recorded at fair value in the mortgage banking derivatives asset or liability, and changes in fair value are recorded to income from mortgage banking within the consolidated statement of income. The fair value of the forward commitments is based on the gain or loss that would occur if the Company were to pair-off the transaction at the measurement date.

The Company also enters into purchase and sale agreements of to-be-announced mortgage-backed securities trades (TBAs). A TBA trade is a contract to buy or sell mortgage-backed securities on a specific date while the underlying mortgages are not announced until just prior to settlement. These TBA trades provide an economic hedge against the effect of changes in interest rates resulting from IRLCs. TBAs are accounted for as derivatives when either of the following conditions exist: (i) when settlement of the TBA trade is not expected to occur at the next regular settlement date (which is typically the next month) or (ii) a mechanism exists to settle the contract on a net basis. As a result, these instruments are recorded at fair value in the mortgage banking derivatives asset or liability with changes in fair value recorded in income from mortgage banking within the consolidated statement of income. The fair value of the TBA trades is based on the gain or loss that would occur if the Company were to pair-off the trade at the measurement date.

The following table reflects the notional amount and fair value of mortgage banking derivatives included in the balance sheet at fair value as of June 30, 2024 and December 31, 2023.

Notional Amount Fair Value
(dollars in thousands)
Balance at June 30, 2024
Included in mortgage banking derivatives asset:
Interest rate lock commitments $ 23,555 $ 758
Forward sales commitments 1,498 40
Included in mortgage banking derivatives liability:
To-be-announced mortgage-backed securities trades 26,000 94
Balance at December 31, 2023
Included in mortgage banking derivatives asset:
Interest rate lock commitments $ 21,791 $ 806
Forward sales commitments 1,826 46
Included in mortgage banking derivatives liability:
To-be-announced mortgage-backed securities trades 23,000 288

Note 14 – Short-Term Borrowed Funds

During the first quarter of 2024, the Company borrowed $5.0 million through the FRB’s Bank Term Funding Program (“BTFP”). The BTFP was established as an additional source of liquidity against high-quality securities valued at par. The program offered loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The note matures on January 22, 2025 and charges interest at a rate of 4.93%. The borrowing is secured by three available for sale agency securities issued by the Small Business Administration with par value totaling $7.5 million. At June 30, 2024, the fair value of the pledged bonds was $6.7 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: increases in our past due loans and provision for credit losses that may result from local and/or broader economic effects, including the impacts of inflation and constraints on the availability of credit that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets; 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 June 30, 2024 and December 31, 2023.

During the six months ended June 30, 2024, the Company’s total assets increased $50.7 million, from $1.07 billion to $1.12 billion.

Cash and cash equivalents decreased $6.0 million during the six months ended June 30, 2024, from $63.4 million to $57.4 million. The decrease in cash and cash equivalents was used to fund growth in the loan portfolio.

Investment securities consist of securities available for sale and securities held to maturity. For the six-month period ended June 30, 2024, investment securities increased $12.7 million from $365.3 million at December 31, 2023 to $378.0 million at June 30, 2024. At June 30, 2024, the Company had net unrealized losses on securities available for sale of $34.1 million, compared to net unrealized losses of $32.6 million at December 31, 2023, a deterioration of $1.5 million. The decline in fair value of the available for sale securities is related to the increase in market interest rates at June 30, 2024 compared to December 31, 2023. During the first six months of 2024, a $10,000 provision was recorded against the allowance for credit losses on securities held to maturity bringing the balance to $66,000, with an amortized cost basis of $27.3 million, at June 30, 2024.

At June 30, 2024, equity securities improved in value from $302,000 at December 31, 2023 to $324,000 as a result of the increase in value in the equity market.

Loans held for sale decreased $1.1 million from December 31, 2023 to $3.6 million at June 30, 2024. Loans held for investment increased from $592.1 million at December 31, 2023 to $636.7 million at June 30, 2024, an increase of $44.7 million. The Company experienced a net increase in all loan sectors with the exception of loans categorized as “Commercial - Other” and "Consumer."

The allowance for credit losses on loans was $5.9 million at June 30, 2024, which represented 0.93% of total loans held for investment, compared to $5.6 million, or 0.94% of total loans held for investment, at December 31, 2023. Additional discussion regarding the allowance is included in the Asset Quality section below.

Other changes in the Company’s consolidated assets are primarily related to interest receivable, which increased $295,000 from $4.4 million as of December 31, 2023 to $4.7 million at June 30, 2024 as a result of the $44.7 million above-mentioned loan growth. Annual Company contributions, offset by negative market adjustments, increased the balance of supplemental executive retirement plans by $177,000 during the six months ended June 30, 2024. Additionally, prepaid expenses, included in other assets, increased $149,000 from $1.4 million as of December 31, 2023 to $1.6 million at June 30, 2024.

Customer deposits, our primary funding source, experienced a $42.4 million increase during the six-month period ended June 30, 2024, increasing from $981.7 million to $1.02 billion. The overall increase in deposits is attributable to organic deposit growth combined with promotional time deposit offerings. Demand noninterest-bearing checking accounts increased $16.5 million, primarily from growth in commercial accounts, and time deposits increased $57.9 million during the six-month period ended June 30, 2024. Interest checking and money market accounts decreased $26.1 million and savings deposits decreased $6.0 million during the six months ended June 30, 2024. The decrease in interest checking, money market and savings accounts is primarily related to the movement of funds into the Company’s higher yielding time deposits.

Total short-term borrowings increased $5.0 million for the six-month period ended June 30, 2024 as the Company borrowed $5.0 million from the BTFP. At June 30, 2024, the Company had $29.1 million in long-term debt outstanding, which consists solely of its junior subordinated debt securities, net of unamortized debt issuance costs. During the third quarter of 2019, the Company issued $10.0 million in subordinated debt securities with a final maturity date of September 30, 2029 that may be redeemed on or after

September 30, 2024. This junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. During the third quarter of 2021, the Company issued $12.0 million and $8.0 million of 10-year and 15-year fixed-to-floating rate subordinated debt securities, respectively. The 10-year subordinated notes mature on September 3, 2031, though they are redeemable at the Company’s option on or after September 3, 2026, and initially pay interest quarterly at an annual rate of 3.5%. From and including September 3, 2026 to but excluding September 3, 2031, or up to any early redemption date, the interest rate on the 10-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month secured overnight financing rate (“SOFR”), plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though they are redeemable at the Company’s option on or after September 3, 2031, and initially pay interest quarterly at an annual rate of 4.0%. From and including September 3, 2031 to but excluding September 3, 2036, or up to any early redemption date, the interest rate on the 15-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month SOFR plus 292 basis points payable quarterly in arrears. The subordinated debt has been structured to qualify as and is included in the calculation of the Company’s Tier 2 capital. The Company also has a $3.0 million line of credit of which $3.0 million was available to use at June 30, 2024.

Other changes in the Company’s liabilities are related to an increase of $770,000 in other liabilities from December 31, 2023 to June 30, 2024 resulting primarily from accrual of reserves for payables due throughout 2024. Accrued interest payable increased $153,000 during the same six-month period as higher interest rates were paid on deposit accounts.

At June 30, 2024, total shareholders’ equity was $41.5 million, an increase of $2.7 million from December 31, 2023. Net income for the six-month period ended June 30, 2024 was $4.6 million, which positively contributed to our shareholders’ equity. During the six months ended June 30, 2024, the Company repurchased 55,861 shares of common stock at a total cost of $436,000, and the Company paid $282,000 in dividends attributable to noncontrolling interest during the same period. See Note 3 (Noncontrolling Interest) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.

Results of Operations for the Three Months Ended June 30, 2024 and 2023.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.2 million for both three-month periods ended June 30, 2024 and 2023. Net income available to common shareholders was $2.1 million, or $0.29 per common share, for the three months ended June 30, 2024 and 2023. 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 June 30, 2024 was $8.8 million, a $749,000 increase from the $8.1 million reported for the comparative period in 2023. During the second quarter of 2024, the average yield on our interest-earning assets increased 56 basis points to 5.14% from the same period in 2023, and the average rate we paid for our interest-bearing liabilities increased 67 basis points to 2.40%. These changes resulted in a lower interest rate spread of 2.74% as of June 30, 2024, compared to 2.85% as of June 30, 2023. The Company’s net interest margin was 3.42% and 3.34% for the comparable periods in 2024 and 2023, respectively.

The following table presents average balance sheet and a net interest income analysis for the three months ended June 30, 2024 and 2023, respectively:

Average Balance Income/Expenses Rate/Yield
2024 2023 2024 2023 2024 2023
(dollars in thousands)
Interest-earning assets:
Taxable securities $ 309,283 $ 299,789 $ 3,011 $ 2,623 3.92 % 3.51 %
Non-taxable securities (1) 57,908 59,259 310 323 2.70 % 2.74 %
Short-term investments 57,206 94,382 710 1,181 4.99 % 5.02 %
Equity securities 343 326 5 5 5.86 % 6.15 %
Taxable loans 609,358 516,067 9,151 6,922 6.04 % 5.38 %
Non-taxable loans (1) 17,312 12,161 134 67 3.91 % 2.77 %
Total interest-earning assets 1,051,410 981,984 13,321 11,121 5.14 % 4.58 %
Interest-bearing liabilities:
Interest-bearing deposits 720,248 675,984 4,097 2,712 2.29 % 1.61 %
Short-term borrowed funds 6,283 948 76 10 4.87 % 4.23 %
Long-term debt 29,127 29,224 332 332 4.58 % 4.56 %
Total interest bearing liabilities 755,658 706,156 4,505 3,054 2.40 % 1.73 %
Net interest spread $ 295,752 $ 275,828 $ 8,816 $ 8,067 2.74 % 2.85 %
Net interest margin (1) (% of earning assets) 3.42 % 3.34 %
  • Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision for Credit Losses

The provision for credit losses was $431,000 for the three months ended June 30, 2024, compared to a provision of $109,000 for the same period in 2023. There were net loan charge-offs of $24,000 for the three months ended June 30, 2024, as compared to net loan recoveries of $16,000 during the same period of 2023. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income decreased by $460,000 for the three-month period ended June 30, 2024, as compared to the same period in 2023. Negative market valuation adjustments on supplemental executive retirement plans contributed $351,000 to the decrease in total noninterest income. This decrease was supplemented by a decline of $285,000 in income from mortgage banking due to the fluctuation in the value of mortgage banking derivatives as several loans were designated as held for investment rather than available for sale during the three months ended June 30, 2023.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and net of associated network costs for the reported periods is presented in the table below:

Three Months Ended June 30,
2024 2023
(dollars in thousands)
Income from debit card transactions $ 592 $ 578
Income from credit card transactions 176 168
Gross interchange and transaction fee income 769 746
Network costs - debit card 281 288
Network costs - credit card 166 143
Total $ 322 $ 315

Noninterest Expense

Noninterest expense for the three months ended June 30, 2024 decreased by $10,000 from the same period in 2023. Salaries and benefits, the largest component of noninterest expense, increased $213,000 due to wage increases and more commissions paid on increased production in the mortgage division during the 2024 period. Negative market adjustments of $351,000 on supplemental executive retirement plans served to offset the increase from salaries and employee benefits.

Total other noninterest expense increased $62,000 for the three months ended June 30, 2024, compared to the same period in 2023. The table below reflects the composition of other noninterest expense for the referenced periods.

Three Months Ended June 30,
2024 2023
(dollars in thousands)
Office supplies and printing $ 17 $ 23
Franchise and other taxes 26 32
Employee education 40 47
Shareholder relations expense 48 51
Telephone and data lines 53 48
Postage 57 53
Director fees and expense 65 79
Dues and subscriptions 93 72
Other 252 184
Total $ 651 $ 589

Income Tax Expense

The Company had income tax expense of $566,000 for the three months ended June 30, 2024 at an effective tax rate of 20.4% compared to income tax expense of $579,000 with an effective tax rate of 20.7% in the comparable 2023 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance.

Results of Operations for the Six Months Ended June 30, 2024 and 2023.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $4.6 million for the six months ended June 30, 2024, as compared to $4.2 million for the six months ended June 30, 2023, an increase of $419,000. Net income available to common shareholders was $4.3 million, or $0.61 per common share, for the six months ended June 30, 2024, compared to $3.9 million, or $0.54 per common share, for the six months ended June 30, 2023. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the six months ended June 30, 2024 was $17.4 million, a $1.4 million increase from the $15.9 million reported for the comparative period in 2023. During the first six months of 2024, the average yield on our interest-earning assets increased 61 basis points to 5.07% from the same period in 2023, and the average rate we paid for our interest-bearing liabilities increased 74 basis points to 2.31%. These changes resulted in a lower interest rate spread of 2.76% as of June 30, 2024, compared to 2.89% as of June 30, 2023. The Company’s net interest margin was 3.40% and 3.33% for the comparable periods in 2024 and 2023, respectively.

The following table presents average balance sheet and a net interest income analysis for the six months ended June 30, 2024 and 2023, respectively:

Average Balance Income/Expenses Rate/Yield
2024 2023 2024 2023 2024 2023
(dollars in thousands)
Interest-earning assets:
Taxable securities $ 308,501 $ 297,005 $ 5,932 $ 5,115 3.87 % 3.47 %
Non-taxable securities (1) 57,855 61,767 622 693 2.71 % 2.83 %
Short-term investments 57,411 101,950 1,336 2,251 4.68 % 4.45 %
Equity securities 322 310 10 10 6.25 % 6.51 %
Taxable loans 598,320 504,928 17,815 13,221 5.99 % 5.28 %
Non-taxable loans (1) 17,397 12,377 264 135 3.83 % 2.75 %
Total interest-earning assets 1,039,806 978,337 25,979 21,425 5.07 % 4.46 %
Interest-bearing liabilities:
Interest-bearing deposits 714,866 676,045 7,826 4,828 2.20 % 1.44 %
Short-term borrowed funds 5,679 977 137 19 4.85 % 3.92 %
Long-term debt 29,118 29,349 662 666 4.57 % 4.58 %
Total interest-bearing liabilities 749,663 706,371 8,625 5,513 2.31 % 1.57 %
Net interest spread $ 290,143 $ 271,966 $ 17,354 $ 15,912 2.76 % 2.89 %
Net interest margin (1) (% of earning assets) 3.40 % 3.33 %
  • Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision for Credit Losses

The provision for credit losses was $401,000 for the six months ended June 30, 2024, compared to a provision of $386,000 for the same period in 2023. There were net loan charge-offs of $58,000 for the six months ended June 30, 2024, as compared to net loan charge-offs of $376,000 during the same period of 2023. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income decreased by $113,000 for the six-month period ended June 30, 2024, as compared to the same period in 2023. The primary factor contributing to the overall decline in noninterest income was a decrease of $145,000 in income from mortgage banking. This decrease is the result of several loans being converted from available for sale to held for investment during the first half of 2023, which improved the value of interest rate lock commitments during the 2023 period.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and net of associated network costs for the reported periods is presented in the table below:

Six Months Ended June 30,
2024 2023
(dollars in thousands)
Income from debit card transactions $ 1,152 $ 1,131
Income from credit card transactions 349 339
Gross interchange and transaction fee income 1,502 1,470
Network costs - debit card 569 544
Network costs - credit card 323 307
Total $ 610 $ 619

Noninterest Expense

Noninterest expense for the six months ended June 30, 2024 increased by $747,000 from the same period in 2023, to $15.7 million. Salaries and employee benefits contributed $683,000 to the increase in noninterest expense due to salary increases and more commissions paid on increased mortgage production during the first six months of 2024.

Total other noninterest expense increased $86,000 for the six months ended June 30, 2024, compared to the same period in 2023. The table below reflects the composition of other noninterest expense for the referenced periods.

Six Months Ended June 30,
2024 2023
(dollars in thousands)
Office supplies and printing $ 37 $ 46
Franchise and other taxes 62 71
Employee education 73 83
Shareholder relations expense 96 88
Telephone and data lines 102 99
Postage 117 112
Director fees and expense 143 168
Dues and subscriptions 175 141
Other 448 359
Total $ 1,253 $ 1,167

Income Tax Expense

The Company had income tax expense of $1.2 million for the six months ended June 30, 2024 at an effective tax rate of 20.7% compared to income tax expense of $1.1 million with an effective tax rate of 20.1% in the comparable 2023 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 six months ended June 30, 2024, the effective tax rate increased due to the increase in interest expense disallowance resulting from compliance with the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The larger disallowance is due to greater projected interest expense for 2024 compared to 2023.

Asset Quality

The Company’s allowance for credit losses on loans is established through charges to earnings in the form of a provision for credit losses. The allowance is increased by provisions charged to operations and recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for credit losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions; and other relevant factors.

The allowance for credit losses on loans represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly.

The Company individually reviews loans with total relationship exposure greater than or equal to $100,000 that are determined to be collateral dependent. These collateral dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. This evaluation is inherently subjective, as it requires material estimates, including internal and external appraisal services. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses on loans and may require additions for estimated losses based upon judgments different from those of management.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company evaluates credit risk in the Consumer segment based upon consumer credit scores and collateral and the Commercial segment based upon loan risk grade and collateral. The allowance for credit losses for each segment is calculated using a Non-Discounted Cash Flow methodology. Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers and then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history, and the current delinquent status.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

At June 30, 2024, the level of our individually assessed loans, which includes all loans in nonaccrual status with total relationship exposure of more than $100,000 of collateral dependency, was $1.4 million. The allowance for credit losses related to individually evaluated loans was $164,000 at June 30, 2024.

The allowance, expressed as a percentage of gross loans held for investment, decreased one basis point from 0.94% at December 31, 2023 to 0.93% at June 30, 2024. The ratio of nonaccrual loans to total loans increased from 0.19% at December 31, 2023 to 0.25% at June 30, 2024, and was related to the $487,000 increase in nonaccrual loans. Three loans totaling $613,000 were converted to nonaccrual during the first half of 2024, offset by principal payments, one loan that was paid off and one loan that was charged off.

Other real estate owned was $141,000 at June 30, 2024 and December 31, 2023.

As of June 30, 2024, management believed the level of the allowance for credit losses on loans was appropriate in light of the risk inherent in the loan portfolio. While management believes that it uses the best information available to establish the allowance for credit losses on loans, future adjustments 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 in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s loan portfolio, will not require an adjustment to the allowance for credit losses on loans. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Any material increase in the allowance for credit losses on loans may adversely affect the Company’s financial condition, results of operations and the value of its securities.

The following table shows the comparison of nonperforming assets at June 30, 2024 and December 31, 2023:

Nonperforming Assets

(dollars in thousands)

June 30, 2024 December 31, 2023
(dollars in thousands)
Nonperforming assets:
Accruing loans past due 90 days or more $ — $ —
Nonaccrual loans 1,588 1,101
Other real estate owned 141 141
Total nonperforming assets $ 1,729 $ 1,242
Allowance for credit losses on loans $ 5,908 $ 5,561
Nonaccrual loans to total loans 0.25 % 0.19 %
Allowance for credit losses on loans to total loans 0.93 % 0.94 %
Allowance for credit losses on loans to nonaccrual loans 372.04 % 505.09 %

Liquidity and Capital Resources

The objective of the Company’s liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature and to fund new loans and investments as opportunities arise.

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. Estimated uninsured deposits, including deposits collateralized by pledged assets, represented 39.1% of total deposits at June 30, 2024 and 36.5% of total deposits at December 31, 2023. The Company and its subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. At June 30, 2024, these sources were the subsidiary bank’s established federal funds lines with correspondent banks aggregating $38.0 million, with available credit of $38.0 million; an established borrowing relationship with the FHLB, with available credit of $160.9 million; and access to borrowings from the FRB discount window, with available credit of $35.9 million. In January 2024, the Company secured $5.0 million in other short-term borrowed funds through the BTFP. The note is secured by three available for sale agency securities issued by the Small Business Administration. The Company also has a $3.0 million line of credit with TIB The Independent BankersBank, N.A. The line is held by the holding company and is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of June 30, 2024, $3.0 million remained available for use on the line of credit.

The following table summarizes the Company’s interest-earning cash and cash equivalents as of the periods indicated.

June 30, 2024 December 31, 2023
(dollars in thousands)
Interest-earning cash and cash equivalents 46,276 56,027
Interest-earning cash and cash equivalents as a percent of:
Total loans held for investment 7.3 % 9.5 %
Total earning assets 4.3 % 5.5 %
Total deposits 4.5 % 5.7 %

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve, the primary federal regulator of the Company and its subsidiary bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

The Company continues to maintain capital ratios that support its asset growth. The federal bank regulatory agencies have implemented regulatory capital rules known as “Basel III.” The Basel III rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. There is also a capital conservation buffer that requires banks to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees. The Company’s accumulated other comprehensive income or loss, resulting from unrealized gains and losses, net of income tax, on investment securities available for sale, is excluded from regulatory capital.

As of June 30, 2024, the Company’s subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.7 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.7 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At June 30, 2024, the Company had $29.1 million, net of unamortized debt issuance costs, in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements include transactions, agreements or other contractual arrangements to which an unconsolidated entity of the Company is a party and pursuant to which the Company has obligations, including an obligation to provide guarantees on behalf of an unconsolidated entity, or retains an interest in assets transferred to an unconsolidated entity. We currently have no off-balance sheet arrangements of this kind.

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through June 30, 2024, with the exception of mortgage banking derivatives. See Note 13 (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 2023 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2024. During the first quarter of 2024, the Company borrowed $5.0 million through the BTFP. The note matures on January 22, 2025 and charges interest at a rate of 4.93%.

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 second quarter of 2024. 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.

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.

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 June 30, 2024.

(a) Total<br>Number<br>of Shares<br>Purchased (b) Average<br>Price Paid<br>per Share (c) Total Number<br>of Shares<br>Purchased as<br>Part of Publicly<br>Announced<br>Plans or Program(1) (d) Maximum<br>Dollar Value <br>(in thousands) <br>of Shares that May<br>Yet Be Purchased<br>Under the Plans
April 1, 2024 Through April 30, 2024 — $ — — $ —
May 1, 2024 Through May 31, 2024 15,696 $ 7.83 — $ —
June 1, 2024 Through June 30, 2024 18,730 $ 7.77 — $ —
Total 34,426 $ 7.80 — $ —
  • 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.

Item 6. Exhibits.

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

Exhibit<br><br>Number Description of Exhibit
3.1 Bylaws of Uwharrie Capital Corp, as amended (Incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the SEC on April 19, 2024)
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 June 30, 2024, in inline XBRL (eXtensible Business Reporting Language) (filed herewith)
104 Cover page interactive data file (formatted in inline XBRL and contained in Exhibit 101)

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: August 6, 2024 By: /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: August 6, 2024 By: /s/ Heather H. Almond
Heather H. Almond
Principal Financial Officer

EX-31.1

Exhibit 31.1

UWHARRIE CAPITAL CORP

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a -14(a)

I, Roger L. Dick, certify that:

  • I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2024 of Uwharrie Capital Corp (the “registrant”);
  • 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;
  • 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;
  • 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:
  • 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;
  • 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;
  • 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
  • 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
  • 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):
  • 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
  • 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: August 6, 2024 /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

UWHARRIE CAPITAL CORP

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Rule 13a -14(a)

I, Heather H. Almond, certify that:

  • I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2024 of Uwharrie Capital Corp the (“registrant”);
  • 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;
  • 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;
  • 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:
  • 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;
  • 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;
  • 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
  • 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
  • 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):
  • 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
  • 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: August 6, 2024 /s/ Heather H. Almond
Heather H. Almond
Principal Financial Officer

EX-32

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 or her knowledge, (i) the Form 10-Q filed by Uwharrie Capital Corp (the “Issuer”) for the quarter ended June 30, 2024, 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: August 6, 2024 /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: August 6, 2024 /s/ Heather H. Almond
Heather H. Almond
Principal Financial Officer

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