Equibles

10-Q

UWHARRIE CAPITAL CORP (UWHR)

10-Q 2020-11-03 For: 2020-09-30
View Original
Added on April 06, 2026

ing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

NORTH CAROLINA 56-1814206
(State or Other Jurisdiction of<br><br><br>Incorporation or Organization) (I.R.S. Employer<br><br><br>Identification No.)
132 NORTH FIRST STREET<br><br><br>ALBEMARLE, NORTH CAROLINA 28001
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (704) 983-6181

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class Trading<br><br><br>Symbol(s) Name of each exchange on which registered
None

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 6,961,230 shares of common stock outstanding as of October 31, 2020.

Table of Contents

Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 7
Notes to Consolidated Financial Statements 8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 37
Item 4 - Controls and Procedures 37
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 37
Item 1A - Risk Factors 37
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3 - Defaults Upon Senior Securities 38
Item 4 - Mine Safety Disclosures 38
Item 5 - Other Information 38
Item 6 - Exhibits 39
Signatures 40

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financial Information

Item 1. Financial Statements.
December 31, 2019*
--- --- --- --- --- ---
ASSETS
Cash and due from banks 6,494 $ 7,520
Interest-earning deposits with banks 63,955 147,678
Cash and cash equivalents 70,449 155,198
Securities available for sale, at fair value 178,582 88,524
Securities held to maturity, at amortized cost (fair value 27,373 and 13,499, respectively) 26,244 13,428
Equity security, at fair value 1,335 —
Loans held for sale 7,812 2,946
Loans:
Loans held for investment 467,726 357,950
Less allowance for loan losses (4,494 ) (1,981 )
Net loans held for investment 463,232 355,969
Premises and equipment, net 16,392 17,062
Interest receivable 2,447 1,666
Restricted stock 1,166 1,144
Bank-owned life insurance 8,901 8,796
Other real estate owned 359 494
Prepaid assets 1,000 714
Servicing assets 3,155 1,723
Other assets 10,830 9,129
Total assets 791,904 $ 656,793
LIABILITIES
Deposits:
Demand noninterest-bearing 200,764 $ 150,283
Interest checking and money market accounts 379,108 263,136
Savings deposits 71,194 57,136
Time deposits, 250,000 and over 9,051 55,682
Other time deposits 53,570 59,641
Total deposits 713,687 585,878
Short-term borrowed funds 635 626
Long-term debt 10,992 9,992
Interest payable 27 55
Other liabilities 12,271 11,384
Total liabilities 737,612 607,935
Off balance sheet items, commitments and contingencies (Note 10)
SHAREHOLDERS’ EQUITY
Common stock, 1.25 par value: 20,000,000 shares authorized; shares issued and<br>   outstanding 6,961,230 and 7,095,920, respectively 8,702 8,870
Common stock dividend distributable 174 —
Preferred stock, 10,000,000 shares authorized; none issued and outstanding — —
Additional paid-in capital 12,756 12,784
Undivided profits 18,600 16,226
Accumulated other comprehensive income 3,405 323
Total Uwharrie Capital shareholders’ equity 43,637 38,203
Noncontrolling interest 10,655 10,655
Total shareholders’ equity 54,292 48,858
Total liabilities and shareholders’ equity 791,904 $ 656,793

All values are in US Dollars.

(*) Derived from audited consolidated financial statements

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

Nine Months Ended September 30,
2019 2020 2019
Interest Income
Loans, including fees 5,190 $ 4,840 $ 14,774 $ 14,242
Investment securities
U.S. Treasury 8 33 74 98
U.S. Government agencies and corporations 427 390 1,153 1,083
State and political subdivisions. non-taxable 215 98 509 308
State and political subdivisions, taxable 276 11 545 29
Equity Securities 34 — 34 —
Interest-earning deposits with banks and federal funds sold 26 678 616 2,158
Total interest income 6,176 6,050 17,705 17,918
Interest Expense
Interest checking and money market accounts 140 333 618 1,101
Savings deposits 14 25 49 78
Time deposits, 250,000 and over 35 265 335 567
Other time deposits 123 188 410 424
Short-term borrowed funds — 2 2 13
Long-term debt 142 145 417 427
Total interest expense 454 958 1,831 2,610
Net interest income 5,722 5,092 15,874 15,308
Provision for (recovery of) loan losses 1,066 (80 ) 2,465 (508 )
Net interest income after provision for (recovery of) loan losses 4,656 5,172 13,409 15,816
Noninterest Income
Service charges on deposit accounts 241 335 763 1,003
Interchange and card transaction fees, net 266 229 640 627
Other service fees and commissions 588 658 1,911 1,987
Gain (loss) on sale of securities 19 (35 ) 77 (35 )
Unrealized gain on equity security 101 — 434 —
Income from mortgage loan sales 3,961 1,197 8,727 2,776
Other income (expense) 370 204 428 185
Total noninterest income 5,546 2,588 12,980 6,543
Noninterest Expense
Salaries and employee benefits 5,254 4,284 14,708 12,669
Net occupancy expense 430 422 1,261 1,245
Equipment expense 202 187 564 546
Data processing costs 171 163 491 557
Loan costs 155 108 409 253
Foreclosed real estate expense 4 100 (17 ) 160
Professional fees and services 313 306 716 658
Marketing and donations 294 144 705 521
Electronic banking expense 120 106 346 307
Software amortization and maintenance 352 249 916 693
FDIC insurance 108 — 216 132
Other noninterest expense 599 528 1,430 1,354
Total noninterest expense 8,002 6,597 21,745 19,095
Income before income taxes 2,200 1,163 4,644 3,264
Income taxes 618 195 1,132 655
Net income 1,582 $ 968 $ 3,512 $ 2,609
Consolidated net income 1,582 $ 968 $ 3,512 $ 2,609
Less: net income attributable to noncontrolling interest (142 ) (142 ) (424 ) (422 )
Net income attributable to Uwharrie Capital Corp and common shareholders 1,440 826 3,088 2,187
Net income per common share
Basic 0.20 $ 0.11 $ 0.43 $ 0.30
Diluted 0.20 $ 0.11 $ 0.43 $ 0.30
Weighted average shares outstanding
Basic 7,105,982 7,323,166 7,145,938 7,370,663
Diluted 7,105,982 7,323,166 7,145,938 7,370,663

All values are in US Dollars.

See accompanying notes

=

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Net income $ 1,582 $ 968 $ 3,512 $ 2,609
Unrealized gain on available for sale securities 333 626 4,080 2,946
Related tax effect (78 ) (146 ) (938 ) (679 )
Reclassification of (gain) loss recognized in net income (19 ) 35 (77 ) 35
Related tax effect 6 (7 ) 17 (7 )
Total other comprehensive income 242 508 3,082 2,295
Comprehensive income 1,824 1,476 6,594 4,904
Less: Comprehensive income attributable to noncontrolling<br><br><br>interest (142 ) (142 ) (424 ) (422 )
Comprehensive income attributable to Uwharrie Capital $ 1,682 $ 1,334 $ 6,170 $ 4,482

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

Number of<br><br><br>Common<br><br><br>Shares<br><br><br>Issued Common<br><br><br>Stock Common Stock<br><br><br>Dividend<br><br><br>Distributable Additional<br><br><br>Paid-in<br><br><br>Capital Undivided<br><br><br>Profits Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>Income (Loss) Non<br><br><br>Controlling<br><br><br>Interest Total
(dollars in thousands, except share data)
Balance, June 30, 2019 7,072,062 $ 8,840 $ — $ 12,683 $ 15,782 $ 93 $ 10,655 $ 48,053
Net Income — — — — 826 — 142 968
Repurchase and retirement of common stock (96,328 ) (120 ) — (360 ) — — — (480 )
Other comprehensive income (loss) — — — — — 508 — 508
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (105 ) (105 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (37 ) (37 )
Balance, September 30, 2019 6,975,734 $ 8,720 $ — $ 12,323 $ 16,608 $ 601 $ 10,655 $ 48,907
Balance, June 30, 2020 6,970,141 $ 8,713 $ — $ 12,250 $ 17,874 $ 3,163 $ 10,655 $ 52,655
Net Income — — — — 1,440 — 142 1,582
2% stock dividend declaration — — 174 540 (714 ) — — —
Repurchase and retirement of common stock (8,911 ) (11 ) — (34 ) — — — (45 )
Other comprehensive income (loss) — — — — — 242 — 242
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (105 ) (105 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (37 ) (37 )
Balance, Ended September 30, 6,961,230 $ 8,702 $ 174 $ 12,756 $ 18,600 $ 3,405 $ 10,655 $ 54,292
Number of<br><br><br>Common<br><br><br>Shares<br><br><br>Issued Common<br><br><br>Stock Common Stock<br><br><br>Dividend<br><br><br>Distributable Additional<br><br><br>Paid-in<br><br><br>Capital Undivided<br><br><br>Profits Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>Income (Loss) Non<br><br><br>Controlling<br><br><br>Interest Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands, except share data)
Balance, December 31, 2018 7,126,541 $ 8,908 $ — $ 12,885 $ 14,421 $ (1,694 ) $ 10,655 $ 45,175
Net Income — — — — 2,187 — 422 2,609
Repurchase and retirement of common stock (150,807 ) (188 ) — (562 ) — — — (750 )
Other comprehensive income (loss) — — — — — 2,295 — 2,295
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (311 ) (311 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (111 ) (111 )
Balance, September 30, 2019 6,975,734 $ 8,720 $ — $ 12,323 $ 16,608 $ 601 $ 10,655 $ 48,907
Balance, December 31, 2019 7,095,920 $ 8,870 $ — $ 12,784 $ 16,226 $ 323 $ 10,655 $ 48,858
Net Income — — — — 3,088 — 424 3,512
2% stock dividend declaration — — 174 540 (714 ) — — —
Repurchase and retirement of common stock (134,690 ) (168 ) — (568 ) — — — (736 )
Other comprehensive income (loss) — — — — — 3,082 — 3,082
Record preferred stock dividend Series B<br><br><br>(noncontrolling interest) — — — — — — (313 ) (313 )
Record preferred stock dividend Series C<br><br><br>(noncontrolling interest) — — — — — — (111 ) (111 )
Balance, Ended September 30, 6,961,230 $ 8,702 $ 174 $ 12,756 $ 18,600 $ 3,405 $ 10,655 $ 54,292

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,
2020 2019
(dollars in thousands)
Cash flows from operating activities
Net income $ 3,512 $ 2,609
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 857 800
Right of use asset amortization 246 232
Provision for (recovery of) loan losses 2,465 (508 )
(Gain) loss on sale of securities available for sale (77 ) 35
(Gain) loss on sale of premises and equipment 16 (4 )
(Gain) loss on sale of OREO (53 ) 38
OREO write-downs 21 105
Unrealized gain on equity securities (434 ) —
Net amortization of premium on investment securities AFS 387 460
Net amortization of premium on investment securities HTM 108 105
Net amortization of mortgage servicing rights 2,222 533
Originations and purchases of mortgage loans for sale (232,471 ) (91,282 )
Proceeds from sales of mortgage loans for sale 225,392 92,317
Accrued interest receivable (781 ) 253
Prepaid assets (286 ) (275 )
Cash surrender value of life insurance (105 ) (87 )
Miscellaneous other assets (2,963 ) 620
Accrued interest payable (28 ) 37
Miscellaneous other liabilities 887 2,649
Net cash provided (used) by operating activities (1,085 ) 8,637
Cash flows from investing activities
Proceeds from sales of investment securities available for sale 13,155 3,513
Proceeds from maturities, calls & paydowns of investment securities held to maturity 5,656 271
Proceeds from maturities, calls & paydowns of investment securities available for sale 7,593 20,200
Purchase of investment securities held to maturity (18,580 ) —
Purchase of investment securities available for sale (107,113 ) (22,466 )
Purchase of equity securities (901 ) —
Purchase of investments in other assets (1,100 ) —
Net change in restricted stock (22 ) (50 )
Net (increase) decrease in loans (109,728 ) 649
Purchase of premises and equipment (449 ) (3,131 )
Proceeds from sale of OREO 167 323
Proceeds from sales of premises, equipment and other assets — 170
Net cash used by investing activities (211,322 ) (521 )
Cash flows from financing activities
Net increase in deposit accounts 127,809 22,352
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase and other short-term borrowings 9 (687 )
Proceeds from long-term borrowings 1,000 386
Common stock repurchased (736 ) (750 )
Dividends paid on preferred stock (noncontrolling interest) (424 ) (422 )
Net cash provided by financing activities 127,658 20,879
Increase (decrease) in cash and cash equivalents (84,749 ) 28,995
Cash and cash equivalents, beginning of period 155,198 117,934
Cash and cash equivalents, end of period $ 70,449 $ 146,929
Supplemental Disclosures of Cash Flow Information
Interest paid $ 1,749 $ 2,574
Income taxes paid 1,327 688
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax $ 3,082 $ 2,295
Loans transferred to foreclosed real estate — 137
Mortgage servicing rights capitalized 2,248 476
Company financed OREO 90 70

See accompanying notes

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management continues to evaluate the impact of COVID-19, the disease caused by the novel Coronavirus, beyond the current impacts as of September 30, 2020, which are discussed throughout the accompanying notes of this report. Management is not aware of additional economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2019 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 4, 2020. This Quarterly Report should be read in conjunction with such Annual Report.

Risks and Uncertainties

Congress, the President, the Federal Reserve, and other federal agencies have taken several actions designed to mitigate the economic fallout of the COVID-19 pandemic. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent or mitigate a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

While it is not possible to know the full extent of the damage to the U.S. and local economies that have been created by the impact of COVID-19, the following are certain areas that could be adversely impacted:

Financial position and results of operations

The Company’s interest income could be reduced due to COVID-19. The Company is actively working with customers affected by the pandemic to defer payments, interest and fees. The interest and fees will continue to accrue, based on GAAP guidelines; however, should credit losses on the deferred payments occur, the accrued interest and fees would be reversed. As such, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Lending operations and accommodations to borrowers

As outlined in the CARES Act, the Company is providing a payment deferral option for commercial and consumer loans adversely affected by the pandemic. In accordance with the CARES Act, these modifications are not required to be reported as troubled debt restructurings. The Company is initially providing up to a three-month deferral period or conversion to interest only repayment for up to three months to allow for re-evaluation in a timely manner based on the economic impact at that time. Additional extensions may be considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program. As of September 30, 2020, 16 outstanding loans were modified with a recorded investment of $12.8 million. Of the loans currently under accommodation, 5 had entered payment deferral a second time. Additionally, 178 previously modified loans with outstanding balances totaling $43.6 million have come out of deferment. Of the loans removed from deferment, 13 with balances totaling $3.4 million were paid-off, 161 loans totaling $39.9 million were out of accommodation and current at September 30, 2020 and 4 loans totaling $346,000 were removed due to noncompliance.

The Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”), was created as part of the CARES Act. The Company participated in assisting its customers with applications for funds through the program.  PPP loans have a two-year term or, if approved after June 5, 2020, a five-year term and earn interest at 1%. The Company believes that the

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majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of September 30, 2020, the Company has funded 1,202 PPP loans representing $81 million. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision expense charged to earnings.

Allowance for loan losses

As a result of job losses, business closures, and the impending termination of certain fiscal stimulus programs enacted under the CARES Act, the Company could incur additional provision expense to increase the allowance for loan losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Use of Estimates

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

Accounting Changes, Reclassifications and Restatements

Certain amounts in the 2019 financial statements have been reclassified to conform to the 2020 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

Note 2 – Comprehensive Income

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

The following table presents the changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019:

For the Nine Months Ended September 30,
2019 2020 2019
Beginning balance 3,163 $ 93 $ 323 $ (1,694 )
Other comprehensive income before reclassifications,<br>   net of (78), (146), (938) and (679) tax effect, respectively 255 480 3,142 2,267
Amounts reclassified from accumulated other comprehensive <br>   income, net of 6, (7), 17 and (7) tax effect, respectively (13 ) 28 (60 ) 28
Net current-period other comprehensive income 242 508 3,082 2,295
Ending balance 3,405 $ 601 $ 3,405 $ 601

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.

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Note 4 – Per Share Data

On October 20, 2020, the Company’s Board of Directors declared a 2% stocked dividend payable on November 23, 2020 to shareholders of record on November 9, 2020. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend. The number of shares and earnings per share for the 2019 periods have also been adjusted for the 2% stock dividend declared on November 12, 2019.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had no stock options outstanding at September 30, 2020 or December 31, 2019.

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 7,105,982 for the three-month period ended September 30, 2020 compared to 7,323,166 for the three-month period ended September 30, 2019. For the nine-month period ended September 30, 2020, the weighted average common shares outstanding was 7,145,938 compared to 7,370,663 for the nine-month period ended September 30, 2019.

Note 5 – Investment Securities

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

September 30, 2020 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(dollars in thousands)
Securities available for sale
U.S. Treasury $ — $ — $ — $ —
U.S. Government agencies 35,033 708 16 35,725
GSE - Mortgage-backed securities and CMO’s 36,952 1,882 83 38,751
Asset-backed securities 38,594 176 26 38,744
State and political subdivisions 55,477 1,735 243 56,969
Corporate bonds 8,104 299 10 8,393
Total securities available for sale $ 174,160 $ 4,800 $ 378 $ 178,582
September 30, 2020 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities held to maturity
U.S. Government agencies $ 460 $ 11 $ — $ 471
State and political subdivisions 17,784 1,118 — 18,902
Corporate bonds 8,000 — — 8,000
Total securities held to maturity $ 26,244 $ 1,129 $ — $ 27,373

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December 31, 2019 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(dollars in thousands)
Securities available for sale
U.S. Treasury $ 4,976 $ 36 $ — $ 5,012
U.S. Government agencies 25,869 18 201 25,686
GSE - Mortgage-backed securities and CMO’s 38,305 413 142 38,576
Asset-backed securities — — — —
State and political subdivisions 13,937 329 45 14,221
Corporate bonds 5,018 11 — 5,029
Total securities available for sale $ 88,105 $ 807 $ 388 $ 88,524
December 31, 2019 Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Securities held to maturity
U.S. Government agencies $ 578 $ 5 $ — $ 583
State and political subdivisions 6,826 62 — 6,888
Corporate bonds 6,024 5 1 6,028
Total securities held to maturity $ 13,428 $ 72 $ 1 $ 13,499

At September 30, 2020 and December 31, 2019, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 for both periods, and Federal Home Loan Bank (FHLB) stock of $657,000 and $635,000, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and is classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2020.

Results from sales of securities available for sale for the three and nine month periods ended September 30, 2020 and September 30, 2019 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(dollars in thousands)
Gross proceeds from sales $ 5,569 $ 3,513 $ 13,155 $ 3,513
Realized gains from sales $ 22 $ — $ 80 $ —
Realized losses from sales 3 35 3 35
Net realized gains (losses) $ 19 $ (35 ) $ 77 $ (35 )

At September 30, 2020 and December 31, 2019, securities available for sale with a carrying amount of $87.7 million and $65.3 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019. These unrealized losses on investment securities are a result of temporary fluctuations in market prices and are in no way a reflection of the credit quality of the investments. At September 30, 2020, the unrealized losses on available for sale securities less than twelve months related to three government-sponsored enterprise (“GSE”) mortgage-backed securities, seven asset-backed securities, thirteen state and political subdivision bonds, two government agency bonds, and one corporate bond. At December 31, 2019, the unrealized losses on available for sale securities less than twelve months related to three government agency bonds, six GSE mortgage backed securities, and one state and political subdivision bond. At December 31, 2019, the Company had four government agency bonds and nine GSE mortgage backed securities that had been in a loss position for twelve months or more. At December 31, 2019, the unrealized losses for less than twelve months on held to maturity securities related to one corporate bond.

Less than 12 Months 12 Months or More Total
September 30, 2020 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities available for sale temporary impairment
U.S. Government agencies $ 3,070 $ 16 $ — $ — $ 3,070 $ 16
GSE-Mortgage-backed securities and CMO’s 10,539 83 — — 10,539 83
Asset-backed securities 17,812 26 — — 17,812 26
State and political subdivisions 15,802 243 — — 15,802 243
Corporate bonds 2,197 10 — — 2,197 10
Total securities available for sale $ 49,420 $ 378 $ — $ — $ 49,420 $ 378
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
September 30, 2020 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities held to maturity temporary impairment
U.S. Government agencies $ — $ — $ — $ — $ — $ —
State and political subdivisions — — — — — —
Corporate bonds — — — — — —
Total securities held to maturity $ — $ — $ — $ — $ — $ —
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2019 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities available for sale temporary impairment
U.S. Government agencies $ 11,956 $ 55 $ 9,704 $ 146 $ 21,660 $ 201
GSE-Mortgage-backed securities and CMO’s 17,613 61 7,431 81 25,044 142
State and political subdivisions 1,694 45 — — 1,694 45
Total securities available for sale $ 31,263 $ 161 $ 17,135 $ 227 $ 48,398 $ 388
Less than 12 Months 12 Months or More Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2019 Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses Fair Value Unrealized<br><br><br>Losses
(dollars in thousands)
Securities held to maturity temporary impairment
Corporate bonds $ 1,502 $ 1 $ — $ — $ 1,502 $ 1
Total securities held to maturity $ 1,502 $ 1 $ — $ — $ 1,502 $ 1

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment, management considers, among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

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 quality but that the losses are temporary in nature. At

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September 30, 2020, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2020 by remaining contractual maturity are as follows:

September 30, 2020
Amortized<br><br><br>Cost Estimated<br><br><br>Fair Value Book<br><br><br>Yield
(dollars in thousands)
Securities available for sale
U.S. Government agencies
Due within twelve months $ 4,993 $ 5,043 1.28 %
Due after one but within five years 13,984 14,262 1.65 %
Due after five but within ten years 9,376 9,652 1.80 %
Due after ten years 6,680 6,768 1.15 %
35,033 35,725 1.54 %
Mortgage-backed securities
Due within twelve months 145 146 2.90 %
Due after one but within five years 287 296 3.20 %
Due after five but within ten years 17,221 18,817 2.40 %
Due after ten years 19,299 19,492 1.19 %
36,952 38,751 1.78 %
Asset-backed securities
Due after ten years 38,594 38,744 1.30 %
38,594 38,744 1.30 %
State and political subdivisions
Due after one but within five years 1,435 1,444 3.79 %
Due after five but within ten years 2,764 2,832 2.14 %
Due after ten years 51,278 52,693 2.50 %
55,477 56,969 2.52 %
Corporate bonds
Due within twelve months 2,001 2,008 2.21 %
Due after one but within five years 6,103 6,385 2.45 %
8,104 8,393 2.39 %
Total securities available for sale
Due within twelve months 7,139 7,197 1.57 %
Due after one but within five years 21,809 22,387 2.04 %
Due after five but within ten years 29,361 31,301 2.19 %
Due after ten years 115,851 117,697 1.80 %
$ 174,160 $ 178,582 1.89 %

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September 30, 2020
Amortized<br><br><br>Cost Estimated<br><br><br>Fair Value Book<br><br><br>Yield
(dollars in thousands)
Held to maturity
U. S. Government agencies
Due after one but within five years $ 460 $ 471 2.89 %
460 471 2.89 %
State and political subdivisions
Due within twelve months 1,376 1,395 2.06 %
Due after one but within five years 2,885 2,981 2.70 %
Due after ten years 13,523 14,526 3.45 %
17,784 18,902 3.22 %
Corporate Bonds
Due after five but within ten years 8,000 8,000 5.23 %
8,000 8,000 5.23 %
Total securities held for maturity
Due within twelve months 1,376 1,395 2.06 %
Due after one but within five years 3,345 3,452 2.73 %
Due after five but within ten years 8,000 8,000 5.23 %
Due after ten years 13,523 14,526 3.45 %
$ 26,244 $ 27,373 3.83 %

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2020 and December 31, 2019 are as follows:

September 30, 2020 December 31, 2019
(dollars in thousands)
Commercial
Commercial $ 62,641 $ 59,075
SBA Paycheck Protection Program (PPP) 80,977 —
Real estate - commercial 143,762 130,998
Other real estate construction loans 31,316 23,043
Other loans 3,161 1,939
Noncommercial
Real estate 1-4 family construction 6,875 7,600
Real estate - residential 76,808 71,370
Home equity 52,032 51,216
Consumer loans 12,358 12,957
469,930 358,198
Less:
Allowance for loan losses (4,494 ) (1,981 )
Deferred loan fees net (2,204 ) (248 )
Loans held for investment, net $ 463,232 $ 355,969

Note 7 – Allowance for Loan Losses

During the second quarter of 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of U.S. Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable in addition to the standard probable loss calculation performed on all non-impaired loans.

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With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) loan category reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional reserves allocated $172,000 to the reserve that was not present prior to June 30, 2020.

In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 from March 31, 2020 to June 30, 2020. Due to the lagging nature of the data (primarily unemployment data from U.S. Government data) used in the multi-factor linear regression, management adopted an additional qualitative factor to incorporate more current unemployment data that was developed from unofficial sources. The impact to the third quarter resulted in a $675,000 additional reserve for loan losses. The factor further represents the uncertainty surrounding the COVID-19 pandemic and adverse economic impacts.

The following table shows the change in the allowance for loss losses by loan segment for the three and nine months ended September 30, 2020 and 2019, respectively:

Commercial Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(dollars in thousands)
Balance, beginning of period $ 2,111 $ 1,243 $ 1,087 $ 1,334
Provision for (recovery of) loan losses 650 (61 ) 1,652 (472 )
Charge-offs — (5 ) (38 ) (10 )
Recoveries 5 6 65 363
Net (charge-offs) / Recoveries 5 1 27 353
Reclassification of reserve for off balance sheet commitments — — — (32 )
Balance at end of period $ 2,766 $ 1,183 $ 2,766 $ 1,183
Non-Commercial Three Months Ended September 30, Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2020 2019 2020 2019
(dollars in thousands)
Balance, beginning of period $ 1,315 $ 936 $ 894 $ 1,040
Provision for (recovery of) loan losses 416 (19 ) 813 (36 )
Charge-offs (17 ) (51 ) (41 ) (116 )
Recoveries 14 22 62 54
Net (charge-offs) / Recoveries (3 ) (29 ) 21 (62 )
Reclassification of reserve for off balance sheet commitments — — — (54 )
Balance at end of period $ 1,728 $ 888 $ 1,728 $ 888
Total Three Months Ended September 30, Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2020 2019 2020 2019
(dollars in thousands)
Balance, beginning of period $ 3,426 $ 2,179 $ 1,981 $ 2,374
Provision for (recovery of) loan losses 1,066 (80 ) 2,465 (508 )
Charge-offs (17 ) (56 ) (79 ) (126 )
Recoveries 19 28 127 417
Net (charge-offs) / Recoveries 2 (28 ) 48 291
Reclassification of reserve for off balance sheet commitments — — — (86 )
Balance at end of period $ 4,494 $ 2,071 $ 4,494 $ 2,071

-15-

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2020 and December 31, 2019:

September 30, 2020
Individually Evaluated Collectively Evaluated Total
Reserve Loans Reserve Loans Reserve Loans
(dollars in thousands)
Commercial $ 49 $ 5,360 $ 2,717 $ 314,424 $ 2,766 $ 319,784
Non-Commercial 76 3,180 1,652 144,762 1,728 147,942
Total $ 125 $ 8,540 $ 4,369 $ 459,186 $ 4,494 $ 467,726
December 31, 2019
--- --- --- --- --- --- --- --- --- --- --- --- ---
Individually Evaluated Collectively Evaluated Total
Reserve Loans Reserve Loans Reserve Loans
(dollars in thousands)
Commercial $ 32 $ 3,660 $ 1,055 $ 209,456 $ 1,087 $ 213,116
Non-Commercial 109 3,175 785 141,659 894 144,834
Total $ 141 $ 6,835 $ 1,840 $ 351,115 $ 1,981 $ 357,950

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

September 30, 2020
Loans<br><br><br>30-89 Days<br><br><br>Past Due Loans<br><br><br>90 Days<br><br><br>or More<br><br><br>Past due<br><br><br>and Non -<br><br><br>Accrual Total Past<br><br><br>Due Loans Current<br><br><br>Loans Total<br><br><br>Loans Accruing<br><br><br>Loans 90 or<br><br><br>More Days<br><br><br>Past Due
(dollars in thousands)
Commercial $ 41 $ — $ 41 $ 62,600 $ 62,641 $ —
SBA Paycheck Protection Program (PPP) — — — 78,904 78,904 —
Real estate - commercial — 2,079 2,079 141,683 143,762 —
Other real estate construction — 1,059 1,059 30,257 31,316 —
Real estate 1-4 family construction — — — 6,875 6,875 —
Real estate - residential 448 670 1,118 75,559 76,677 —
Home equity 22 62 84 51,948 52,032 —
Consumer loans 17 — 17 12,341 12,358 —
Other loans — — — 3,161 3,161 —
Total $ 528 $ 3,870 $ 4,398 $ 463,328 $ 467,726 $ —

-16-

December 31, 2019
Loans<br><br><br>30-89 Days<br><br><br>Past Due Loans<br><br><br>90 Days<br><br><br>or More<br><br><br>Past due<br><br><br>and Non -<br><br><br>Accrual Total Past<br><br><br>Due Loans Current<br><br><br>Loans Total<br><br><br>Loans Accruing<br><br><br>Loans 90 or<br><br><br>More Days<br><br><br>Past Due
(dollars in thousands)
Commercial $ 190 $ — $ 190 $ 58,885 $ 59,075 $ —
Real estate - commercial — 2,088 $ 2,088 128,910 130,998 —
Other real estate construction 14 — $ 14 23,029 23,043 —
Real estate 1-4 family construction — — — 7,600 7,600 —
Real estate - residential 326 752 1,078 70,044 71,122 —
Home equity 57 82 139 51,077 51,216 —
Consumer loan 27 — 27 12,930 12,957 —
Other loans — — — 1,939 1,939 —
Total $ 614 $ 2,922 $ 3,536 $ 354,414 $ 357,950 $ —

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

The Company had $0 in foreclosed residential real estate and $396,000 of residential real estate in process of foreclosure at September 30, 2020. At December 31, 2019, the Company had $130,000 in foreclosed residential real estate and $387,000 of residential real estate in process of foreclosure.

The composition of non-accrual loans by class as of September 30, 2020 and December 31, 2019 was as follows:

September 30, 2020 December 31, 2019
(dollars in thousands)
Commercial $ — $ —
SBA Paycheck Protection Program (PPP) — —
Real estate - commercial 2,079 2,088
Other real estate construction 1,059 —
Real estate 1 – 4 family construction — —
Real estate – residential 670 752
Home equity 62 82
Consumer loans — —
Other loans — —
$ 3,870 $ 2,922

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

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

Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

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

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

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2020 and December 31, 2019:

September 30, 2020
Pass Watch Sub-<br><br><br>standard Doubtful Total
(dollars in thousands)
Commercial $ 60,074 $ 2,567 $ — $ — $ 62,641
SBA Paycheck Protection Program (PPP) 78,904 — — — 78,904
Real estate - commercial 139,722 1,132 2,908 — 143,762
Other real estate construction 29,592 390 1,334 — 31,316
Real estate 1 - 4 family construction 6,875 — — — 6,875
Real estate - residential 73,347 2,471 859 — 76,677
Home equity 50,682 1,288 62 — 52,032
Consumer loans 12,280 77 1 — 12,358
Other loans 3,161 — — — 3,161
Total $ 454,637 $ 7,925 $ 5,164 $ — $ 467,726
December 31, 2019
--- --- --- --- --- --- --- --- --- --- ---
Pass Watch Sub-<br><br><br>standard Doubtful Total
(dollars in thousands)
Commercial $ 56,151 $ 2,921 $ 3 $ — $ 59,075
Real estate - commercial 126,498 1,194 3,306 — 130,998
Other real estate construction 21,253 1,477 313 — 23,043
Real estate 1 - 4 family construction 7,600 — — — 7,600
Real estate - residential 67,647 2,464 1,011 — 71,122
Home equity 50,255 879 82 — 51,216
Consumer loans 12,877 79 1 — 12,957
Other loans 1,939 — — — 1,939
Total $ 344,220 $ 9,014 $ 4,716 $ — $ 357,950

Loans that are in non-accrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2020 and December 31, 2019 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2020 and December 31, 2019:

September 30, 2020
Performing Non-<br><br><br>Performing Total
(dollars in thousands)
Commercial $ 62,641 $ — $ 62,641
SBA Paycheck Protection Program (PPP) 78,904 — 78,904
Real estate - commercial 141,683 2,079 143,762
Other real estate construction 30,257 1,059 31,316
Real estate 1 – 4 family construction 6,875 — 6,875
Real estate – residential 76,007 670 76,677
Home equity 51,970 62 52,032
Consumer loans 12,358 — 12,358
Other loans 3,161 — 3,161
Total $ 463,856 $ 3,870 $ 467,726

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December 31, 2019
Performing Non-<br><br><br>Performing Total
(dollars in thousands)
Commercial $ 59,075 $ — $ 59,075
Real estate - commercial 128,910 2,088 130,998
Other real estate construction 23,043 — 23,043
Real estate 1 – 4 family construction 7,600 — 7,600
Real estate – residential 70,370 752 71,122
Home equity 51,134 82 51,216
Consumer loans 12,957 — 12,957
Other loans 1,939 — 1,939
Total $ 355,028 $ 2,922 $ 357,950

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2020 and December 31, 2019.

September 30, 2020
Unpaid<br><br><br>Principal<br><br><br>Balance Recorded<br><br><br>Investment<br><br><br>With No<br><br><br>Allowance Recorded<br><br><br>Investment<br><br><br>With<br><br><br>Allowance Related<br><br><br>Allowance
(dollars in thousands)
Commercial $ 692 $ 40 $ 652 $ 19
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,567 2,079 1,488 28
Other real estate construction 1,101 1,059 42 2
Real estate 1 - 4 family construction — — — —
Real estate - residential 3,102 1,668 1,434 69
Home equity 62 19 43 6
Consumer loans 16 — 16 1
Other loans — — — —
Total $ 8,540 $ 4,865 $ 3,675 $ 125
December 31, 2019
--- --- --- --- --- --- --- --- ---
Unpaid<br><br><br>Principal<br><br><br>Balance Recorded<br><br><br>Investment<br><br><br>With No<br><br><br>Allowance Recorded<br><br><br>Investment<br><br><br>With<br><br><br>Allowance Related<br><br><br>Allowance
(dollars in thousands)
Commercial $ 4 $ — $ 4 $ —
Real estate - commercial 3,612 1,923 1,689 29
Other real estate construction 44 — 44 3
Real estate 1 - 4 family construction — — — —
Real estate - residential 3,070 987 2,083 99
Home equity 82 13 69 10
Consumer loans 23 — 23 —
Total $ 6,835 $ 2,923 $ 3,912 $ 141

-19-

Three Months ended September 30, 2020 Three Months ended September 30, 2019
Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income
(dollars in thousands)
Commercial $ 693 $ 6 $ 5 $ —
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,576 41 2,676 87
Other real estate construction 1,112 1 45 1
Real estate 1- 4 family construction — — — —
Real estate - residential 3,122 39 3,025 45
Home equity 64 — 168 —
Consumer loans 17 — 26 1
Other loans — — — —
Total $ 8,584 $ 87 $ 5,945 $ 134
Nine Months Ended<br><br><br>September 30, 2020 Nine Months Ended September 30, 2019
--- --- --- --- --- --- --- --- ---
Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income Average<br><br><br>Recorded<br><br><br>Investment Interest<br><br><br>Income
(dollars in thousands)
Commercial $ 368 $ 23 $ 6 $ —
SBA Paycheck Protection Program (PPP) — — — —
Real estate - commercial 3,590 83 1,939 122
Other real estate construction 848 2 69 2
Real estate 1- 4 family construction — — — —
Real estate - residential 3,154 108 2,995 117
Home equity 72 1 124 4
Consumer loans 19 1 28 2
Other loans — — — —
Total $ 8,051 $ 218 $ 5,161 $ 247

Note 8 – Troubled Debt Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the “other” category are TDRs with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as TDRs are typically already on non-accrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

At September 30, 2020, the Company had $4.7 million in TDRs outstanding, of which one with a balance totaling $46,000 was on a non-accruing basis. Comparatively, the Company had $3.9 million of outstanding TDRs, of which one with a balance of $26,000 was non-accruing, at December 31, 2019.

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For the three and nine months ended September 30, 2020 and 2019, the following table presents a breakdown of the types of concessions made by loan class:

For the three months ended September 30, 2020
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial — $ — $ —
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial — — —
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 1 23 23
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 1 $ 23 $ 23
For the three months ended September 30, 2019
--- --- --- --- --- --- ---
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial 1 $ 50 $ 5
Real estate - commercial — — —
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential — — —
Home equity — — —
Consumer loans — — —
Other loans
Total 1 $ 50 $ 5
For the nine months ended September 30, 2020
--- --- --- --- --- --- ---
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial 2 $ 690 $ 690
SBA Paycheck Protection Program (PPP) — — —
Real estate - commercial 1 829 829
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential 3 351 351
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 6 $ 1,870 $ 1,870

-21-

For the nine months ended September 30, 2019
Number<br><br><br>of Contracts Pre-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment Post-Modification<br><br><br>Outstanding Recorded<br><br><br>Investment
(dollars in thousands)
Commercial 1 $ 50 $ 5
Real estate - commercial 1 1,629 848
Other real estate construction — — —
Real estate 1 – 4 family construction — — —
Real estate – residential — — —
Home equity — — —
Consumer loans — — —
Other loans — — —
Total 2 $ 1,679 $ 853

During the twelve months ended September 30, 2020, there was one TDR for which there was a payment default. During the twelve months ended September 30, 2019, there were two TDRs for which there was a payment default.

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $119,000 in the allowance for loan losses as of September 30, 2020, as a direct result of these TDRs. At September 30, 2019, there was $119,000 in the allowance for loan losses related to TDRs.

The following table presents the status of the types of loans modified as TDRs within the previous twelve months as of September 30, 2020 and 2019:

Paid In Full Paying as restructured Converted to non-accrual Foreclosure/ Default
Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments
(dollars in thousands)
September 30, 2020
Below market interest rate — $ — 1 $ 219 — $ — — $ —
Extended payment Terms — — — — — — — —
Forgiveness of Principal/Other 1 91 8 1,864 — — — —
Total 1 $ 91 9 $ 2,083 — $ — — $ —
September 30, 2019
Below market interest rate — $ — — $ — — $ — — $ —
Extended payment Terms — — — — — — — —
Forgiveness of Principal/Other 3 340 2 1,679 — — 1 242
Total 3 $ 340 2 $ 1,679 — $ — 1 $ 242

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

The Company initially provided up to a three-month deferral period or conversion to interest only repayment for up to three months. Additional extensions have been considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program. As of September 30, 2020, the Company had 16 current outstanding modified loans with a recorded investment of $12.8 million. Of the loans currently under accommodation, 5 had entered payment deferral a second

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time. Additionally, 178 previously modified loans with outstanding balances totaling $43.6 million have come out of deferment. Of the loans removed from deferment, 13 with balances totaling $3.4 million were paid-off, 161 loans totaling $39.9 million were out of accommodation and current at September 30, 2020 and 4 loans totaling $346,000 were removed due to noncompliance.

As of September 30, 2020, the Company’s modifications of loans for COVID-19 related reasons are disclosed in the table below:

Interest only Payment deferral Other Total COVID-19 modifications
Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments Number of<br><br><br>Loans Recorded<br><br><br>Investments
(dollars in thousands)
September 30, 2020
Commercial — $ — 1 $ 416 — $ — 1 $ 416
Real estate - commercial 2 5,867 3 5,951 — — 5 11,818
Other real estate construction — — — — — — — —
Other loans — — — — — — — —
Real estate – residential 2 160 3 376 — — 5 536
Home equity — — — — — — — —
Consumer loans — — 5 62 — — 5 62
Total 4 6,027 12 6,805 — — 16 12,832

Note 9 - Leases

Operating leases in which we are the lessee are recorded as operating lease right of use (“ROU”) assets and operating lease liabilities, included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for the lease incentives. Operating lease expense, which is comprised 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.

Our leases relate to three office locations, two of which are branch locations, with remaining terms of one to nine 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 and they are not included in the lease term. As of September 30, 2020, operating lease ROU assets were $1.7 million and the lease liability was $1.8 million, compared to ROU assets of $2.0 million and a lease liability of $2.1 million at September 30, 2019. Lease costs associated with all leases is $96,000 and $287,000 for the three and nine months ended September 30, 2020 respectively.

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

Nine Months Ended September 30,
2020 2019
(in thousands except percent and period data)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 285 $ 263
Right-of-use assets obtained in exchange for new operating lease liabilities 1,699 2,026
Weighted-average remaining lease term - operating leases, in years 7.2 7.7
Weighted-average discount rate - operating leases 2.95 % 2.80 %

The table below summarizes the maturity of remaining lease liabilities:

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September 30, 2020
(in thousands)
2020 $ 96
2021 347
2022 225
2023 229
2024 233
2025 and thereafter 846
Total lease payments 1,976
Less: Interest (208 )
Present value of lease liabilities 1,768

Note 10 - Commitments and Contingencies

The Company’s subsidiary bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

The Bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured.

At September 30, 2020, outstanding financial instruments whose contract amounts represent credit risk were approximately:

September 30, 2020 December 31, 2019
(dollars in thousands)
Commitments to extend credit $ 141,723 $ 134,241
Credit card commitments 12,717 11,650
Standby letters of credit 1,145 1,213
Total commitments $ 155,585 $ 147,104

Note 11 – Fair Value Disclosures

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

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 are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market value; 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; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. The Company typically bases the fair value of the collateral on appraised values, which the Company considers Level 3 valuations.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The Company typically bases the fair value of the collateral on appraised values, which the Company considers Level 3 valuations.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. These loans are recorded in Level 2.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

September 30, 2020
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Treasury $ — $ — $ — $ —
U.S. Government agencies 35,725 — 35,725 —
GSE - Mortgage-backed securities and CMO’s 38,751 — 38,751 —
Asset-backed securities 38,744 — 38,744 —
State and political subdivisions 56,969 — 56,969 —
Corporate bonds 8,393 — 8,393 —
Equity securities 1,335 1,335 — —
Total assets at fair value on a recurring basis $ 179,917 $ 1,335 $ 178,582 $ —
December 31, 2019
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Securities available for sale:
U.S. Treasury $ 5,012 $ 5,012 $ — $ —
U.S. Government agencies 25,686 — 25,686 —
GSE - Mortgage-backed securities and CMO’s 38,576 — 38,576 —
Asset-backed securities — — — —
State and political subdivisions 14,221 — 14,221 —
Corporate bonds 5,029 — 5,029 —
Equity securities — — — —
Total assets at fair value on a recurring basis $ 88,524 $ 5,012 $ 83,512 $ —

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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. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2020 and December 31, 2019:

September 30, 2020
(dollars in thousands)
Total Level 1 Level 2 Level 3
Impaired loans $ 3,550 $ — $ — $ 3,550
Other real estate owned 359 — — 359
Total assets at fair value on a nonrecurring basis $ 3,909 $ — $ — $ 3,909
December 31, 2019
--- --- --- --- --- --- --- --- ---
(dollars in thousands)
Total Level 1 Level 2 Level 3
Impaired loans $ 3,771 $ — $ — $ 3,771
Other real estate owned 364 — — 364
Total assets at fair value on a nonrecurring basis $ 4,135 $ — $ — $ 4,135

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2020
Valuation Technique Unobservable Input General<br><br><br>Range
Nonrecurring measurements:
Impaired loans Discounted appraisals Collateral discounts and Estimated costs to sell 0 – 25%
Discounted cash flows Discount rates 4%-8.75%
OREO Discounted appraisals Collateral discounts and Estimated costs to sell 0 – 10%
December 31, 2019
--- --- --- ---
Valuation Technique Unobservable Input General<br><br><br>Range
Nonrecurring measurements:
Impaired loans Discounted appraisals Collateral discounts and Estimated costs to sell 0 – 25%
Discounted cash flows Discount rates 4%-8.75%
OREO Discounted appraisals Collateral discounts and Estimated costs to sell 0 – 10%

At September 30, 2020, impaired loans were being evaluated with discounted expected cash flows or discounted appraisals were being used on collateral dependent loans.

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

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

The fair value estimates presented at September 30, 2020 and December 31, 2019 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 valuations at September 30, 2020 are observed under the exit price notion as a result of adoption of ASU 2016-01. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2020 and December 31, 2019:

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September 30, 2020
Carrying<br><br><br>Value Estimated<br><br><br>Fair Value Level 1 Level 2 Level 3
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 70,449 $ 70,463 $ 68,955 $ 1,508 $ —
Securities available for sale 178,582 178,582 — 178,582 —
Securities held to maturity 26,244 27,373 — 19,373 8,000
Equity securities 1,335 1,335 1,335 — —
Loans held for investment, net 463,232 458,600 — — 458,600
Loans held for sale 7,812 7,812 — 7,812 —
Restricted stock 1,166 1,166 1,166 — —
Loan servicing rights 3,155 3,332 — 3,332 —
Accrued interest receivable 2,447 2,447 — — 2,447
FINANCIAL LIABILITIES
Deposits $ 713,687 $ 713,944 $ — $ 713,944 $ —
Short-term borrowings 635 635 — 635 —
Long-term borrowings 10,992 11,168 — — 11,168
Accrued interest payable 27 27 — — 27
December 31, 2019
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br><br><br>Value Estimated<br><br><br>Fair Value Level 1 Level 2 Level 3
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 155,198 $ 155,202 $ 152,957 $ 2,245 $ —
Securities available for sale 88,524 88,524 5,012 83,512 —
Securities held to maturity 13,428 13,499 — 10,499 3,000
Loans held for investment, net 355,969 354,269 — — 354,269
Loans held for sale 2,946 2,946 — 2,946 —
Restricted stock 1,144 1,144 1,144 — —
Loan servicing rights 1,723 3,228 — 3,228
Accrued interest receivable 1,666 1,666 — — 1,666
FINANCIAL LIABILITIES
Deposits 585,878 567,130 — 567,130 —
Short-term borrowings 626 626 — 626 —
Long-term debt 9,992 10,180 — — 10,180
Accrued interest payable 55 55 — — 55

At September 30, 2020 the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 10.

Note 13 – Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. During 2019, the effective date was extended to fiscal years beginning on or after December 15, 2022 for public entities that qualify as smaller reporting companies, per the Securities and Exchange Commission definition, which currently includes the Company. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We have entered into a contract to outsource our current model with a CECL-ready vendor. We are currently

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evaluating the various methods of determining credit losses within the software. The impact of the adoption is dependent on loan portfolio composition and credit quality at adoption date, as well as economic conditions and forecasts at that time.

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.

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

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: the impact of the novel Coronavirus disease, or COVID-19, on our borrowers’ ability to meet their financial obligations to us; increases in our past due loans and provisions for loan losses that may result from COVID-19; declines in general economic conditions, including increased stress in the financial markets due to COVID-19; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019.

During the nine months ended September 30, 2020, the Company’s total assets increased $135.1 million, from $656.8 million to $791.9 million.

Cash and cash equivalents decreased $84.7 million during the nine months ended September 30, 2020. The decrease is directly related to the increased investments made in the securities portfolio in an effort to sustain the yield on earning assets after rates dropped significantly during the first quarter.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $102.9 million to $204.8 million for the nine-month period ended September 30, 2020, due to investments of cash into longer-term, higher yielding assets. At September 30, 2020, the Company had net unrealized gains on securities available for sale of $4.4 million, compared to net unrealized gains of $419,000 as December 31, 2019. The significant improvement is directly related to the decline of the bond yields at September 30, 2020 compared to December 31, 2019, as the market reacted to the COVID-19 outbreak worldwide.

An additional investment was made into an equity security during the nine months ended September 30, 2020 of $901,000. The value of the equity security increased $434,000 by the end of the third quarter, resulting in a fair value of $1.3 million for the security at September 30, 2020.

Loans held for investment increased from $358.0 million to $467.7 million, an increase of $109.7 million for the nine-month period. The Company experienced net growth in nearly all sectors with the largest increase (not including PPP loans) occurring in the other real estate construction segment related to funding on two large hotel loans. During the second and third quarter of 2020, the Company funded 1,202 SBA PPP loans for a total of $81.0 million. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. Loans held for sale increased 265.1%, or $4.9 million, as many of the loans produced near the September 30, 2020 quarter-end date were not sold on the secondary market until early October. The increase in re-finance activity due to a favorable interest rate environment for borrowers has increased production for the mortgage division of the Company.

The allowance for loan losses was $4.5 million at September 30, 2020, which represented 0.96% of the total loans held for investment compared to $2.0 million or 0.55% of the total loans held for investment at December 31, 2019. Additional discussion regarding the increase in the allowance is included in the Asset Quality section below.

Other changes in our consolidated assets are primarily related to prepaid assets, other assets and loan servicing assets. Prepaid assets have increased $286,000 from December 31, 2019 to September 30, 2020, as annual property and business insurance payments are due during the first quarter of the year. Other assets increased $1.7 million during the first nine months of 2020, primarily due an investment in a community development project. Loan servicing assets increased by $1.4 million during the nine-month period as a result of the aforementioned production growth within the Company’s mortgage division.

Customer deposits, our primary funding source, experienced a $127.8 million increase during the nine-month period ended September 30, 2020, increasing from $585.9 million to $713.7 million, a 21.8% increase. A portion of this increase is related to funding of SBA PPP loans, some of the proceeds of which were deposited by our customers into their deposit accounts held at the Company’s subsidiary bank. Demand noninterest-bearing checking accounts increased $50.5 million and savings deposits increased $14.1 million. Interest checking and money market accounts increased by $116.0 million, of which $41.0 million is related to an account that moved from time deposits greater than $250,000 due to maturity. Other time deposits decreased $52.7 million during the nine-month period ended September 30, 2020.

Total short-term borrowings increased $8,900 for the period. At September 30, 2020, the Company has $11.0 million in long-term debt outstanding, which consisted primarily of its fixed rate junior subordinated debt securities issued on September 30, 2019. The

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subordinated debt securities have a final maturity date of September 30, 2029, though may be redeemed by the Company on or after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. The Company has a $3 million line of credit of which $1 million was in use at September 30, 2020.

Other liabilities increased from $11.4 million at December 31, 2019 to $12.3 million at September 30, 2020, an increase of $888,000, primarily due to the accrual for payment of income taxes.

At September 30, 2020, total shareholders’ equity was $54.3 million, an increase of $5.4 million from December 31, 2019. Net income for the nine-month period was $3.5 million. Unrealized gains/losses on investment securities, net of tax, improved by $3.1 million. The Company repurchased 134,690 shares of common stock at a total cost of $736,000 during the first nine months of 2020. The Company paid $424,000 in dividends attributed to noncontrolling interest during the first nine months of 2020. See Note 3 (Noncontrolling Interest) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended September 30, 2020 and 2019.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.6 million for the three months ended September 30, 2020, as compared to $968,000 for the three months ended September 30, 2019, an increase of $614,000. Net income available to common shareholders was $1.4 million or $0.20 per common share, at September 30, 2020, compared to $826,000 or $0.11 per common share, at September 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the three months ended September 30, 2020 was $5.7 million, compared to $5.1 million for the three months ended September 30, 2019, an increase of $630,000. During the third quarter of 2020, the average yield on our interest-earning assets decreased sixty-three basis points to 3.42%, and the average rate we paid for our interest-bearing liabilities decreased fifty-three basis points to 0.36%. The aforementioned changes resulted in a lower interest rate spread of 3.06% as of September 30, 2020, compared to 3.16% as of September 30, 2019. Our net interest margin was 3.18% and 3.41% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the three months ended September 30, 2020 and 2019:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2020 2019 2020 2019 2020 2019
Interest-earning assets:
Taxable securities $ 150,035 $ 82,794 $ 711 $ 433 1.89 % 2.07 %
Nontaxable securities (1) 31,338 16,233 215 100 3.53 % 3.05 %
Short-term investments 77,341 123,009 26 677 0.13 % 2.18 %
Equity Securities 1,235 — 34 — 10.95 % 0.00 %
Taxable loans 456,624 365,425 5,124 4,771 4.46 % 5.18 %
Non-taxable loans (1) 9,657 10,073 66 69 3.53 % 3.39 %
Total interest-earning assets 726,230 597,534 6,176 6,050 3.42 % 4.05 %
Interest-bearing liabilities:
Interest-bearing deposits 488,100 418,714 312 812 0.25 % 0.77 %
Short-term borrowed funds 548 618 — 2 0.00 % 1.28 %
Long-term debt 10,989 9,978 142 144 5.14 % 5.73 %
Total interest bearing liabilities 499,637 429,310 454 958 0.36 % 0.89 %
Net interest spread $ 226,593 $ 168,224 $ 5,722 $ 5,092 3.06 % 3.16 %
Net interest margin (1) (% of earning assets) 3.18 % 3.41 %
(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 23% tax rate.
--- ---

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Provision (Recovery) and Allowance for Loan Losses

The provision for loan losses was $1.1 million for the three months ended September 30, 2020, compared to a recovery of $80,000 for the same period in 2019. There were net loan recoveries of $2,000 for the three months ended September 30, 2020, as compared with net loan charge-offs of $28,000 during the same period of 2019. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by $3.0 million for the three-month period ended September 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of $2.8 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates remained low during the third quarter of 2020.

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $101,000, which is reported in noninterest income.

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

Three Months Ended September 30,
2020 2019
(in thousands)
Income from debit card transactions $ 455 $ 400
Income from credit card transactions 111 $ 116
Gross interchange and transaction fee income 566 516
Network costs - debit card 178 $ 169
Network costs - credit card 122 $ 118
Total net income $ 266 $ 229

Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 increased by $1.4 million from September 30, 2019, to $8.0 million. Salaries and benefits, the largest component of noninterest expense, increased $970,000 to account for wage and benefit cost increases as well as increased commissions for increased production in the mortgage division. As a result of production growth in the mortgage division, loan costs increased by $48,000 to $155,000 for the three months ended September 30, 2020.

The table below reflects the composition of other noninterest expense.

Three Months Ended September 30,
2020 2019
(dollars in thousands)
Postage $ 51 $ 40
Telephone and data lines 34 48
Office supplies and printing 31 20
Shareholder relations expense 32 38
Dues and subscriptions 113 64
Other 338 318
Total $ 599 $ 528

Income Tax Expense

The Company had income tax expense of $618,000 for the three months ended September 30, 2020 at an effective tax rate of 28.1% compared to income tax expense of $195,000 with an effective tax rate of 16.8% in the comparable 2019 period. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance. In 2020, the effective tax rate increased due to an additional tax accrual related to a supplemental executive retirement plan, or SERP, distribution.

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Comparison of Results of Operations for the Nine Months Ended September 30, 2020 and 2019.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $3.5 million for the nine months ended September 30, 2020, as compared to $2.6 million for the nine months ended September 30, 2019, an increase of $903,000. Net income available to common shareholders was $3.1 million, or $0.43 per common share, at September 30, 2020, compared to $2.2 million or $0.30 per common share, at September 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the nine months ended September 30, 2020 and 2019 was $15.9 million and 15.3 million, respectively. During the first three quarters of 2020, the average yield on our interest-earning assets decreased forty-eight basis points to 3.54%, and the average rate we paid for our interest-bearing liabilities decreased twenty-seven basis points to 0.52%. The aforementioned changes resulted in a lower interest rate spread of 3.03% as of September 30, 2020, compared to 3.23% as of September 30, 2019. Net interest margin was 3.18% and 3.44% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the nine months ended September 30, 2020 and 2019:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(dollars in thousands)
Average Balance Income/Expenses Rate/Yield
2020 2019 2020 2019 2020 2019
Interest-earning assets:
Taxable securities $ 115,824 $ 83,277 $ 1,772 $ 1,209 2.04 % 1.94 %
Nontaxable securities (1) 24,582 16,837 509 309 3.57 % 3.08 %
Short-term investments 112,343 125,691 616 2,158 0.73 % 2.30 %
Equity Securities 821 — 34 — 5.53 % —
Taxable loans 411,462 364,552 14,570 14,061 4.73 % 5.16 %
Non-taxable loans (1) 9,819 9,357 204 181 3.58 % 3.24 %
Total interest-earning assets 674,851 599,714 17,705 17,918 3.54 % 4.02 %
Interest-bearing liabilities:
Interest-bearing deposits 462,155 429,329 1,412 2,170 0.41 % 0.68 %
Short-term borrowed funds 482 1,086 2 13 0.55 % 1.60 %
Long-term debt 10,798 9,975 417 427 5.16 % 5.72 %
Total interest-bearing liabilities 473,435 440,390 1,831 2,610 0.52 % 0.79 %
Net interest spread $ 201,416 $ 159,324 $ 15,874 $ 15,308 3.03 % 3.23 %
Net interest margin (1) (% of earning assets) 3.18 % 3.44 %
(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 23% tax rate.
--- ---

Provision (Recovery) and Allowance for Loan Losses

The provision for loan losses was $2.5 million for the nine months ended September 30, 2020, compared to a recovery of $508,000 for the same period in 2019. There were net loan recoveries of $48,000 for the nine months ended September 30, 2020, as compared with net loan recoveries of $291,000 during the same period of 2019. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by $6.4 million for the nine-month period ended September 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of $6.0 million in income from mortgage

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loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates fell during the first quarter and remained historically low through the third quarter of 2020.

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $434,000, which is reported in noninterest income.

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

Nine Months Ended September 30,
2020 2019
(in thousands)
Income from debit card transactions $ 1,248 $ 1,131
Income from credit card transactions 323 335
Gross interchange and transaction fee income 1,571 1,466
Network costs - debit card 522 482
Network costs - credit card 409 357
Total net income $ 640 $ 627

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2020 increased by $2.7 million from September 30, 2019, to $21.7 million. Salaries and benefits, the largest component of noninterest expense, increased $2.0 million to account for wage and benefit cost increase as well as increased commissions for increased production in the mortgage division. As a result of production growth in the mortgage division, loan costs increased by $156,000 to $409,000 for the nine months ended September 30, 2020.  Additionally, costs associated with software and technology updates increased by $223,000 from September 30, 2019 to September 30, 2020.

The table below reflects the composition of other noninterest expense.

Nine Months Ended September 30,
2020 2019
(in thousands)
Postage $ 142 $ 148
Telephone and data lines 128 140
Office supplies and printing 81 80
Shareholder relations expense 96 114
Dues and subscriptions 284 196
Other 699 676
Total $ 1,430 $ 1,354

Income Tax Expense

The Company had income tax expense of $1.1 million for the nine months ended September 30, 2020 at an effective tax rate of 24.4% compared to income tax expense of $655,000 with an effective tax rate of 20.1% in the comparable 2019 period. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance. In 2020, the effective tax rate increased due to an additional tax accrual related to a SERP distribution.

Asset Quality

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

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function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history, and the current delinquent status. Because of this process, certain loans are deemed to be impaired and evaluated as an impaired loan.

During the second quarter of 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of U.S. Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable in addition to the standard probable loss calculation performed on all non-impaired loans. With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional reserves allocated $172,000 to the reserve that was not present prior to June 30, 2020. In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 from March 31, 2020 to June 30, 2020.

During the third quarter, due to the lagging nature of the data (primarily unemployment data from U.S. Government data) used in the multi-factor linear regression, management adopted an additional qualitative factor to incorporate more current unemployment data that was developed from unofficial sources. The impact to the third quarter resulted in a $675,000 additional reserve for loan losses. The factor further represents the uncertainty surrounding the COVID-19 pandemic and extended economic impacts.

The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans within the loan portfolio and adds additional loss based on economic uncertainty and specific indicators of potential issues in the market. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience. An additional calculation based on economic uncertainty is added to the probable losses, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well as a reserve for qualitative factors based on management’s discretion of economic conditions, form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data derived from the Company’s internal historical data, representing a one-year loss horizon for each obligor. Credit scores are used within the model to determine the probability of default. The Company updates the credit scores for individuals that either have a loan, or are financially responsible for the loan, semi-annually, during the first and third quarters. During the first nine months of 2020, the average effective credit score of the portfolio, excluding loans in default, increased slightly from 768 to 772. The probability of default associated with each credit score is a major driver in the allowance for loan losses.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Unexpected global events, such as the unprecedented economic disruption due to

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COVID-19, are the type of future events that often cause material adjustments to the allowance to be necessary. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

At September 30, 2020, the levels of our impaired loans, which includes all loans in non-accrual status, TDRs, and other loans deemed by management to be impaired, were $8.5 million, compared to $6.8 million at December 31, 2019, a net increase of $1.7 million. The increase is related to one large relationship moving into non-accrual status during the first quarter of 2020 and one large relationship being modified as a TDR in the second quarter of 2020. Total non-accrual loans, which are a component of impaired loans, increased from $2.9 million at December 31, 2019 to $3.9 million at September 30, 2020. During the first nine months of 2020, five additional loans totaling $2.0 million were added to impaired loans; however, three loans totaling $141,000 were closed.  That was offset by net pay downs of $169,000.

The allowance, expressed as a percentage of gross loans held for investment, increased forty-one basis points from 0.55% at December 31, 2019 to 0.96% at September 30, 2020. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.52% at December 31, 2019 and 0.95% at September 30, 2020. The increase is attributable to the model adjustments discussed above allowing additional economic factors to increase qualitative factors related to the worldwide COVID-19 outbreak. This outbreak, which resulted in many businesses closing and staff layoffs, led management to increase the allowance allocated based on economic outlook in the model to the largest allowable based on internal policy. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 2.06% to 1.46% for the same periods, mainly due to the two large relationships totaling $1.7 million that were deemed impaired during the first nine months of 2020, though little reserve is recognized based on the net realizable value.

The ratio of nonperforming loans, which consists of non-accrual loans and loans past due 90 days and still accruing, to total loans increased from 0.82% at December 31, 2019, to 0.83% at September 30, 2020, related to the large impaired relationship added in the first quarter, for which the Company believes it is sufficiently collateralized.

As of September 30, 2020, management believed the level of the allowance for loan losses was appropriate in light of the risk inherent in the loan portfolio.

Other real estate owned decreased $135,000 during the first nine months of 2020. The Company sold three pieces of foreclosed property totaling $130,000, realizing a gain of $53,000. The Company had $21,000 in write-downs for the period ended September 30, 2020. There were no loans foreclosed on during the first nine months of 2020.

Troubled debt restructured loans at September 30, 2020 totaled $4.7 million compared to $3.9 million at December 31, 2019 and are included in impaired loans. The increase is related to one relationship of $650,000 that was added during the second quarter of 2020. At September 30, 2020, there was one troubled debt restructured loan in non-accrual status, which had a balance of $46,000.

As discussed in Note 8 of our Notes to Consolidated Financial Statements, the CARES Act allows for loan modifications related to COVID-19 impacts to be excluded from TDR status. As of September 30, 2020, the Company had 16 current outstanding loan portfolio modifications of COVID-19 impacted loans for $12.8 million. Of the loans currently under accommodation, 5 had entered payment deferral a second time. Additionally, 178 previously modified loans with outstanding balances totaling $43.6 million have come out of deferment. Of the loans removed from deferment, 13 with balances totaling $3.4 million were paid-off, 161 loans totaling $39.9 million were out of accommodation and current at September 30, 2020 and 4 loans totaling $346,000 were removed due to noncompliance.

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The following table shows the comparison of nonperforming assets at September 30, 2020 to December 31, 2019:

Nonperforming Assets

(dollars in thousands)

September 30, 2020 December 31, 2019
Nonperforming assets:
Loans past due 90 days or more $ — $ —
Non-accrual loans 3,870 2,922
Other real estate owned 359 494
Total nonperforming assets $ 4,229 $ 3,416
Allowance for loans losses $ 4,494 $ 1,981
Nonperforming loans to total loans 0.83 % 0.82 %
Allowance for loan losses to total loans 0.96 % 0.55 %
Nonperforming assets to total assets 0.53 % 0.52 %
Allowance for loan losses to nonperforming loans 116.12 % 67.80 %

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $28 million at September 30, 2020, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $52.3 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $24.8 million and the issuance of commercial paper. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A., during the first quarter of 2020. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of September 30, 2020, we had $2.0 million that had not been extended and remained available for use on the line of credit. The Company has also previously secured long-term debt from other sources. Total outstanding debt from these sources included $10.0 million of junior subordinated debt at both September 30, 2020 and December 31, 2019.

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 Basel III rules began to phase in for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements effective on January 1, 2019. As of September 30, 2020, the Company’s subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 30, 2020, the Company had $10.0 million in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.

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Off-Balance Sheet Arrangements

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

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through September 30, 2020 and have no current plans to do so.

Contractual Obligations

The timing and amount of our contractual obligations has not changed materially since our 2019 Annual Report to Shareholders, which is filed as Exhibit 13 to our 2019 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act (“Exchange Act”) Rule 13a-15.

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2020. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings. From time to time, the Company’s subsidiary bank is engaged in ordinary routine litigation incidental to its business.

Item 1A. Risk Factors.

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

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

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2020.

(a) Total<br><br><br>Number of<br><br><br>Shares<br><br><br>Purchased (b) Average<br><br><br>Price Paid per<br><br><br>Share (c) Total Number<br><br><br>of Shares<br><br><br>Purchased as<br><br><br>Part of Publicly<br><br><br>Announced<br><br><br>Plans or Program<br><br><br>(1) (d) Maximum<br><br><br>Dollar Value of<br><br><br>Shares that May<br><br><br>Yet Be<br><br><br>Purchased Under<br><br><br>the Plans
July 1, 2020 Through July 31, 2020 4,452 $ 4.59 — $ —
August 1, 2020 Through August 31, 2020 — $ — — $ —
September 1, 2020 Through September 30, 2020 4,459 $ 5.43 — $ —
Total 8,911 $ 5.01 — $ —
(1) Trades of the Company’s common stock are quoted on the OTC Pink Market from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows.
--- ---
Item 3. Defaults Upon Senior Securities.
--- ---

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

None.

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Item 6. Exhibits.

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

Exhibit<br><br><br>Number Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101 Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, in XBRL (eXtensible Business Reporting Language) (filed herewith)

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UWHARRIE CAPITAL CORP
(Registrant)
Date: November 3, 2020 By: /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: November 3, 2020 By: /s/ R. David Beaver, III
R. David Beaver, III
Principal Financial Officer

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uwhr-ex311_8.htm

Exhibit 31.1

UWHARRIE CAPITAL CORP

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a -14(a)

I, Roger L. Dick, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2020 of Uwharrie Capital Corp (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: November 3, 2020 /s/ Roger L. Dick
--- --- ---
Roger L. Dick
President and Chief Executive Officer

uwhr-ex312_6.htm

Exhibit 31.2

UWHARRIE CAPITAL CORP

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Rule 13a -14(a)

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

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2020 of Uwharrie Capital Corp the (“registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: November 3, 2020 /s/ R. David Beaver, III
--- --- ---
R. David Beaver, III
Principal Financial Officer

uwhr-ex32_7.htm

Exhibit 32

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

to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned each hereby certifies that, to his knowledge, (i) the Form 10-Q filed by Uwharrie Capital Corp (the “Issuer”) for the quarter ended September 30, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: November 3, 2020 /s/ Roger L. Dick
Roger L. Dick
President and Chief Executive Officer
Date: November 3, 2020 /s/ R. David Beaver, III
R. David Beaver, III
Principal Financial Officer

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