UWHR 10-Q Quarterly Report Sept. 30, 2022

UWHR 10-Q Quarter ended Sept. 30, 2022

Exhibits

Exhibits

UWHARRIE CAPITAL CORP

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uwhr-10q_20220930.htm

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, 2022

☐	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 Incorporation or Organization)		(I.R.S. Employer Identification No.)

132 NORTH FIRST STREET 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

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: 6,915,002 shares of common stock outstanding as of November 2, 2022.

Table of Contents

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	7

	Notes to Consolidated Financial Statements	8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4 -	Controls and Procedures	36

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	37

Item 3 -	Defaults Upon Senior Securities	37

Item 4 -	Mine Safety Disclosures	37

Item 5 -	Other Information	37

Item 6 -	Exhibits	38

	Signatures	39

-2-

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financial Information

Item 1.

Financial Statements.

	September 30, 2022 (Unaudited)			December 31, 2021*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	5,821		$	5,298
Interest-earning deposits with banks		147,397			89,112
Cash and cash equivalents		153,218			94,410
Securities available for sale, at fair value		321,382			330,337
Securities held to maturity, at amortized cost (fair value $ 26,990 and $ 32,045 respectively)		30,343			30,801
Equity security, at fair value		321			392
Loans held for sale		4,740			21,684
Loans:
Loans held for investment		477,175			420,779
Less allowance for loan losses		( 2,661	)		( 4,026	)
Net loans held for investment		474,514			416,753
Premises and equipment, net		14,885			15,987
Interest receivable		3,203			2,554
Restricted stock		1,428			921
Bank-owned life insurance		9,155			9,066
Deferred income tax benefit		11,560			1,729
Loan servicing assets		5,149			5,078
Mortgage banking derivatives		799			1,269
Other assets		7,984			8,699
Total assets	$	1,038,681		$	939,680

LIABILITIES
Deposits:
Demand noninterest-bearing	$	293,112		$	239,422
Interest checking and money market accounts		499,515			422,942
Savings deposits		107,088			103,341
Time deposits, $250,000 and over		46,422			23,720
Other time deposits		17,424			47,327
Total deposits		963,561			836,752
Short-term borrowed funds		1,103			1,081
Long-term debt		29,588			29,530
Mortgage banking derivatives		220			50
Other liabilities		11,717			11,480
Total liabilities		1,006,189			878,893

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 outstanding 6,928,661 and 6,959,556 , at September 30, 2022 and December 31, 2021, respectively		8,661			8,700
Common stock dividend distributable		216			—
Additional paid-in capital		12,886			12,032
Undivided profits		34,138			30,551
Accumulated other comprehensive loss		( 34,064	)		( 1,151	)
Total Uwharrie Capital Corp shareholders’ equity		21,837			50,132
Noncontrolling interest		10,655			10,655
Total shareholders’ equity		32,492			60,787
Total liabilities and shareholders’ equity	$	1,038,681		$	939,680

(*)	Derived from audited consolidated financial statements

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	5,367		$	6,242		$	15,771		$	17,639
Investment securities
Investment securities, taxable		1,577			740			3,820			2,247
Investment securities, non-taxable		391			309			1,119			793
Equity Securities		5			5			15			15
Interest-earning deposits with banks and federal funds sold		725			53			1,012			96
Total interest income		8,065			7,349			21,737			20,790
Interest Expense
Interest checking and money market accounts		434			105			693			292
Savings deposits		20			18			57			48
Time deposits, $250,000 and over		25			17			53			63
Other time deposits		34			36			100			159
Short-term borrowed funds		2			1			3			3
Long-term debt		338			192			1,011			463
Total interest expense		853			369			1,917			1,028
Net interest income		7,212			6,980			19,820			19,762
Recovery of loan losses		( 1,512	)		( 1,057	)		( 1,407	)		( 1,232	)
Net interest income after recovery of loan losses		8,724			8,037			21,227			20,994

Noninterest Income
Service charges on deposit accounts		282			253			786			735
Interchange and card transaction fees, net		315			261			856			819
Other service fees and commissions		763			842			2,465			2,272
Gain (loss) on sale of securities		—			—			( 91	)		991
Realized/unrealized loss on equity securities		( 6	)		( 2	)		( 71	)		( 14	)
Income from mortgage banking		819			2,323			3,258			9,498
Supplemental executive retirement plan gain (loss)		( 74	)		786			( 626	)		1,125
Other income		139			97			542			415
Total noninterest income		2,238			4,560			7,119			15,841
Noninterest Expense
Salaries and employee benefits		4,868			5,833			14,796			16,455
Net occupancy expense		424			433			1,276			1,319
Equipment expense		199			192			580			529
Data processing costs		204			170			610			500
Loan costs		92			192			356			689
Professional fees and services		217			239			633			707
Marketing and donations		359			215			898			1,036
Electronic banking expense		123			101			351			285
Software amortization and maintenance		304			335			923			1,058
FDIC insurance		84			69			237			177
Supplemental executive retirement plan gain (loss)		( 74	)		786			( 626	)		1,125
Other noninterest expense		600			616			1,789			1,695
Total noninterest expense		7,400			9,181			21,823			25,575
Income before income taxes		3,562			3,416			6,523			11,260
Income taxes		737			732			1,215			2,389
Net income	$	2,825		$	2,684		$	5,308		$	8,871
Consolidated net income	$	2,825		$	2,684		$	5,308		$	8,871
Less: net income attributable to noncontrolling interest		( 142	)		( 142	)		( 422	)		( 422	)
Net income attributable to Uwharrie Capital Corp and common shareholders		2,683			2,542			4,886			8,449
Net income per common share
Basic	$	0.38		$	0.35		$	0.69		$	1.14
Diluted	$	0.38		$	0.35		$	0.69		$	1.14
Weighted average shares outstanding
Basic		7,103,874			7,347,615			7,111,126			7,398,562
Diluted		7,103,874			7,347,615			7,111,126			7,398,562

See accompanying notes

-4-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands)

Net income	$	2,825		$	2,684		$	5,308		$	8,871

Unrealized loss on available for sale securities		( 12,158	)		( 2,354	)		( 42,836	)		( 5,126	)
Related tax effect		2,796			535			9,849			1,197
Reclassification of (gain) loss recognized in net income		—			—			91			( 991	)
Related tax effect		—			6			( 17	)		210

Total other comprehensive loss		( 9,362	)		( 1,813	)		( 32,913	)		( 4,710	)

Comprehensive income (loss)		( 6,537	)		871			( 27,605	)		4,161

Less: Comprehensive income attributable to noncontrolling interest		( 142	)		( 142	)		( 422	)		( 422	)

Comprehensive income (loss) attributable to Uwharrie Capital Corp	$	( 6,679	)	$	729		$	( 28,027	)	$	3,739

See accompanying notes

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

	Number of Common Shares Issued			Common Stock			Common Stock Dividend Distributable		Additional Paid-in Capital			Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total
	(dollars in thousands, except share data)
Balance, June 30, 2021		6,964,242		$	8,705		$	—	$	12,030		$	28,907		$	1,263		$	10,655		$	61,560
Net Income		—			—			—		—			2,542			—			142			2,684
3 % stock dividend declaration		—			—			261		1,630			( 1,891	)		—			—			—
Repurchase and retirement of common stock		( 14,608	)		( 18	)		—		( 110	)		—			—			—			( 128	)
Other comprehensive loss		—			—			—		—			—			( 1,813	)		—			( 1,813	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 105	)		( 105	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 37	)		( 37	)
Balance, September 30, 2021		6,949,634		$	8,687		$	261	$	13,550		$	29,558		$	( 550	)	$	10,655		$	62,161

Balance, June 30, 2022		6,930,717		$	8,664		$	—	$	11,814		$	32,754		$	( 24,702	)	$	10,655		$	39,185
Net Income		—			—			—		—			2,683			—			142			2,825
2.5 % stock dividend declaration		—			—			216		1,083			( 1,299	)		—			—			—
Repurchase and retirement of common stock		( 2,056	)		( 3	)		—		( 11	)		—			—			—			( 14	)
Other comprehensive loss		—			—			—		—			—			( 9,362	)		—			( 9,362	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 105	)		( 105	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 37	)		( 37	)
Balance, September 30, 2022		6,928,661		$	8,661		$	216	$	12,886		$	34,138		$	( 34,064	)	$	10,655		$	32,492

	Number of Common Shares Issued			Common Stock			Common Stock Dividend Distributable		Additional Paid-in Capital			Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2020		7,052,143		$	8,815		$	—	$	12,607		$	23,000		$	4,160		$	10,655		$	59,237
Net Income		—			—			—		—			8,449			—			422			8,871
3 % stock dividend declaration		—			—			261		1,630			( 1,891	)		—			—			—
Repurchase and retirement of common stock		( 102,509	)		( 128	)		—		( 687	)		—			—			—			( 815	)
Other comprehensive loss		—			—			—		—			—			( 4,710	)		—			( 4,710	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 311	)		( 311	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 111	)		( 111	)
Balance, September 30, 2021		6,949,634		$	8,687		$	261	$	13,550		$	29,558		$	( 550	)	$	10,655		$	62,161

Balance, December 31, 2021		6,959,556		$	8,700		$	—	$	12,032		$	30,551		$	( 1,151	)	$	10,655		$	60,787
Net Income		—			—			—		—			4,886			—			422			5,308
2.5 % stock dividend declaration		—			—			216		1,083			( 1,299	)		—			—			—
Repurchase and retirement of common stock		( 30,895	)		( 39	)		—		( 229	)		—			—			—			( 268	)
Other comprehensive loss		—			—			—		—			—			( 32,913	)		—			( 32,913	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 311	)		( 311	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 111	)		( 111	)
Balance, September 30, 2022		6,928,661		$	8,661		$	216	$	12,886		$	34,138		$	( 34,064	)	$	10,655		$	32,492

See accompanying notes

-6-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2022			2021
	(dollars in thousands)
Cash flows from operating activities
Net income	$	5,308		$	8,871
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		860			845
Right of use asset amortization		263			252
Recovery of loan losses		( 1,407	)		( 1,232	)
(Gain) loss on sale of securities available for sale		91			( 991	)
Gain on sale of premises and equipment		( 152	)		( 41	)
Gain on sale of mortgage loans		2,341			7,345
Realized/unrealized loss on equity securities		71			14
Net amortization of premium on investment securities available for sale		2,074			963
Net amortization of premium on investment securities held to maturity		111			116
Amortization of loan servicing rights		1,019			1,153
Originations and purchases of mortgage loans for sale		( 107,019	)		( 273,575	)
Proceeds from sales of mortgage loans for sale		121,622			263,452
Mortgage banking derivatives		640			489
Loan servicing assets		( 1,090	)		( 2,322	)
Accrued interest receivable		( 649	)		( 156	)
Prepaid assets		( 56	)		267
Cash surrender value of life insurance		( 89	)		( 97	)
Miscellaneous other assets		1,181			881
Accrued interest payable		63			48
Miscellaneous other liabilities		46			1,565
Net cash provided by operating activities		25,228			7,847
Cash flows from investing activities
Proceeds from sales of investment securities available for sale		8,398			49,280
Proceeds from sale of equity securities		—			929
Proceeds from maturities, calls and paydowns of securities available for sale		32,304			15,363
Proceeds from maturities, calls and paydowns of securities held to maturity		347			2,253
Purchase of investment securities available for sale		( 76,657	)		( 170,268	)
Purchase of investment securities held to maturity		—			( 2,750	)
Purchase of investments in other assets		( 409	)		( 326	)
Proceeds from sales of investments in other assets		—			1,120
Net change in restricted stock		( 507	)		245
Net (increase) decrease in loans		( 56,354	)		35,906
Purchase of premises and equipment		( 228	)		( 559	)
Proceeds from sale of premises and equipment		545			336
Net cash used by investing activities		( 92,561	)		( 68,471	)
Cash flows from financing activities
Net increase in deposit accounts		126,809			70,128
Net increase in federal funds purchased and other short-term borrowings		22			420
Proceeds from long-term borrowings		—			20,000
Debt issuance costs		—			( 481	)
Repayment of long-term borrowings		—			( 1,000	)
Repurchase of common stock, net		( 268	)		( 815	)
Dividends paid on preferred stock (noncontrolling interest)		( 422	)		( 422	)
Net cash provided by financing activities		126,141			87,830
Increase in cash and cash equivalents		58,808			27,206
Cash and cash equivalents, beginning of period		94,410			88,868
Cash and cash equivalents, end of period	$	153,218		$	116,074
Supplemental disclosures of cash flow information
Interest paid	$	1,792		$	975
Income taxes paid		1,217			1,727
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax	$	( 32,913	)	$	( 4,710	)
Initial ROU asset for leased properties		128			—
Initial lease liability for leased properties		126			—

See accompanying notes

-7-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management 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 2021 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 9, 2022. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Accounting Changes, Reclassifications and Restatements

Certain amounts in the 2021 financial statements have been reclassified to conform to the 2022 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

Note 2 – Comprehensive Income (Loss)

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

The following table presents the changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)

Beginning balance	$	( 24,702	)	$	1,263		$	( 1,151	)	$	4,160

Other comprehensive loss before reclassifications, net of $ 2,796 , $ 535 , $ 9,849 and $ 1,197 tax effect, respectively		( 9,362	)		( 1,819	)		( 32,987	)		( 3,929	)

Amounts reclassified from accumulated other comprehensive loss, net of $ 0 , $ 6 , ($ 17 ) and $ 210 tax effect, respectively		—			6			74			( 781	)

Net current-period other comprehensive loss		( 9,362	)		( 1,813	)		( 32,913	)		( 4,710	)

Ending balance	$	( 34,064	)	$	( 550	)	$	( 34,064	)	$	( 550	)

-8-

Note 3 – Noncontrolling Interest

In 2013, the Company’s subsidiary bank issued a total of $ 10.7 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30 %. The preferred stock has no voting rights . This capital is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income.

Note 4 – Per Share Data

On October 18, 2022 , the Company’s Board of Directors declared a 2.5 % stock dividend payable on November 22, 2022 to shareholders of record on November 8, 2022 . 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 2021 periods have also been adjusted for the 3 % stock dividend declared on October 19, 2021 .

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, 2022 or December 31, 2021.

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 7,103,874 for the three-month period ended September 30, 2022 compared to 7,347,615 for the three-month period ended September 30, 2021. For the nine-month period ended September 30, 2022, the weighted average common shares outstanding was 7,111,126 compared to 7,398,562 for the nine-month period ended September 30, 2021.

Note 5 – Investment and Equity Securities

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

September 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	54,940	$	—	$	4,448	$	50,492
U.S. Government agencies		36,422		89		1,075		35,436
GSE - Mortgage-backed securities and CMOs		130,992		—		16,638		114,354
Asset-backed securities		39,347		276		363		39,260
State and political subdivisions		97,919		1		21,506		76,414
Corporate bonds		6,000		—		574		5,426
Total securities available for sale	$	365,620	$	366	$	44,604	$	321,382

September 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	152	$	—	$	4	$	148
State and political subdivisions		15,191		—		2,195		12,996
Corporate bonds		15,000		—		1,154		13,846
Total securities held to maturity	$	30,343	$	—	$	3,353	$	26,990

-9-

December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	26,675	$	16	$	310	$	26,381
U.S. Government agencies		40,066		172		426		39,812
GSE - Mortgage-backed securities and CMOs		121,994		190		1,736		120,448
Asset-backed securities		43,383		875		60		44,198
State and political subdivisions		89,786		892		1,201		89,477
Corporate bonds		9,928		148		55		10,021
Total securities available for sale	$	331,832	$	2,293	$	3,788	$	330,337

December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	175	$	1	$	—	$	176
State and political subdivisions		15,626		1,096		—		16,722
Corporate bonds		15,000		196		49		15,147
Total securities held to maturity	$	30,801	$	1,293	$	49	$	32,045

The Company owned Federal Reserve Bank (FRB) stock reported at cost of $ 959,000 and $ 509,000 at September 30, 2022 and December 31, 2021, respectively. The Company owned Federal Home Loan Bank (FHLB) stock reported at cost of $ 469,000 and $ 411,000 at September 30, 2022 and December 31, 2021, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and are classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2022.

Results from sales of securities available for sale for the three and nine-month periods ended September 30, 2022 and September 30, 2021 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022			2021
	(dollars in thousands)
Gross proceeds from sales	$	—	$	—	$	8,398		$	49,280

Realized gains from sales	$	—	$	—	$	52		$	1,505
Realized losses from sales		—		—		143			514
Net realized gains (losses)	$	—	$	—	$	( 91	)	$	991

At September 30, 2022 and December 31, 2021, securities available for sale with a carrying amount of $ 154.4 million and $ 104.9 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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, 2022 and December 31, 2021. We believe these unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments. At September 30, 2022, the unrealized losses on available for sale securities less than twelve months related to six U.S. Treasury bonds, eight government agency bonds, thirty-seven government-sponsored enterprise (GSE) mortgage-backed securities, eleven asset-backed securities and twenty-three state and political subdivision bonds. Unrealized losses on held to maturity securities related to one government agency bond, eight corporate bonds and ten state and political subdivision bonds that had been in a loss position less than twelve months at September 30, 2022. At December 31, 2021, the unrealized losses on available for sale securities less than twelve months related to three U.S. Treasury bonds, fourteen government agency bonds, thirty GSE mortgage-backed securities, five asset-backed securities, thirty-four state and political subdivision bonds and three corporate bonds. There were eight corporate held to maturity bonds that had been in a loss position less than twelve months at December 31, 2021. At

-10-

September 30, 2022 , the Company had three U.S. Treasury bonds, ten government agency bonds , twenty-four GSE mortgage-backed securit ies , one asset-backed security , forty state and political subdivision bond s and three corporate bonds that were classified as available for sale and in a loss position for twelve months or more . Unrealized losses on held to maturity securities related to six corporate bonds that had been in a loss position twelve months or more at September 30, 2022. The Company had two government agency bonds, one GSE mortgage-backed security and nine state and political subdivision bonds that were classified as available for sale and in a loss position for twelve months or more at December 31, 2021.

	Less than 12 Months				12 Months or More				Total
September 30, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	36,603	$	1,886	$	13,889	$	2,562	$	50,492	$	4,448
U.S. Government agencies		10,789		849		9,734		226		20,523		1,075
GSE-Mortgage-backed securities and CMOs		58,787		6,582		55,567		10,056		114,354		16,638
Asset-backed securities		19,387		347		683		16		20,070		363
State and political subdivisions		32,681		7,189		43,312		14,317		75,993		21,506
Corporate bonds		—		—		5,426		574		5,426		574
Total securities available for sale	$	158,247	$	16,853	$	128,611	$	27,751	$	286,858	$	44,604

	Less than 12 Months				12 Months or More				Total
September 30, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities held to maturity temporary impairment
U.S. Government agencies		148		4		—		—		148		4
State and political subdivisions		12,996		2,195		—		—		12,996		2,195
Corporate bonds		10,236		764		3,610		390		13,846		1,154
Total securities held to maturity	$	23,380	$	2,963	$	3,610	$	390	$	26,990	$	3,353

	Less than 12 Months				12 Months or More				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	16,306	$	310	$	—	$	—	$	16,306	$	310
U.S. Government agencies		19,702		396		2,313		30		22,015		426
GSE-Mortgage-backed securities and CMOs		93,928		1,607		4,210		129		98,138		1,736
Asset-backed securities		8,531		60		—		—		8,531		60
State and political subdivisions		52,959		892		9,272		309		62,231		1,201
Corporate bonds		5,945		55		—		—		5,945		55
Total securities available for sale	$	197,371	$	3,320	$	15,795	$	468	$	213,166	$	3,788

	Less than 12 Months				12 Months or More				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities held to maturity temporary impairment
U.S. Government agencies	$	—	$	—	$	—	$	—	$	—	$	—
State and political subdivisions		—		—		—		—		—		—
Corporate bonds		5,201		49		—		—		5,201		49
Total securities held to maturity	$	5,201	$	49	$	—	$	—	$	5,201	$	49

-11-

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 credit quality, but that the losses are temporary in nature. At September 30, 2022, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following tables show contractual maturities of the investment portfolio as of September 30, 2022:

	September 30, 2022
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities available for sale

Due within twelve months		105		105		4.50	%
Due after one but within five years		42,815		41,540		3.41	%
Due after five but within ten years		94,029		82,125		1.65	%
Due after ten years		228,671		197,612		2.35	%
	$	365,620	$	321,382		2.29	%

	September 30, 2022
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities held to maturity

Due within twelve months		1,037		1,035		2.20	%
Due after one but within five years		1,046		1,027		2.35	%
Due after five but within ten years		15,000		13,846		4.57	%
Due after ten years		13,260		11,082		2.85	%
	$	30,343	$	26,990		3.66	%

The portion of unrealized gains and losses for the three and nine months ended September 30, 2022 and 2021 related to equity securities still held at the reporting date is calculated as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)
Gross proceeds from sales	$	—		$	—		$	—		$	929

Net losses recognized during the period on equity securities	$	( 6	)	$	( 2	)	$	( 71	)	$	( 14	)
Less: Net losses recognized from equity securities sold during the period		—			—			—			( 18	)
Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date	$	( 6	)	$	( 2	)	$	( 71	)	$	4

-12-

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2022 and December 31, 2021 is as follows:

	September 30, 2022			December 31, 2021
	(dollars in thousands)
Commercial
Commercial	$	75,184		$	73,035
SBA Paycheck Protection Program (PPP)		640			15,840
Real estate - commercial		182,141			150,382
Other real estate construction loans		35,659			28,275
Other loans		5,145			5,496
Noncommercial
Real estate 1-4 family construction		6,505			8,424
Real estate - residential		103,941			78,824
Home equity		57,783			51,003
Consumer loans		9,499			9,579
		476,497			420,858
Less:
Allowance for loan losses		( 2,661	)		( 4,026	)
Deferred loan costs (fees) net		678			( 79	)

Loans held for investment, net	$	474,514		$	416,753

T he Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”), was created as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The Company participated in assisting its customers with applications for funds through the program. PPP loans have a two-year term or, if approved after June 5, 2020, a five-year term and earn interest at 1 %. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2022, the Company had funded 1,202 PPP loans representing $ 81.0 million. Of the loans funded, 1,196 loans totaling $ 80.8 million had been paid off or forgiven by the SBA as of September 30, 2022. The Consolidated Appropriations Act, 2021, or CAA, established another round of PPP loan funding for certain eligible borrowers, and the Company assisted these borrowers in obtaining a first or second draw loan. The Company had funded 879 second round PPP loans totaling $ 46.4 million as of September 30, 2022. Of the loans funded during the second round, 859 loans totaling $ 45.9 million had been paid off or forgiven by the SBA as of September 30, 2022. Remaining deferred loan fees of $ 30,000 and remaining deferred loan costs of $ 4,000 were attributable to the second round of PPP loans at September 30, 2022. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision expense charged to earnings.

Note 7 – Allowance for Loan Losses

The following tables show the change in the allowance for loan losses by loan segment for the three and nine months ended September 30, 2022 and 2021, respectively:

Commercial	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)

Balance, beginning of period	$	2,560		$	2,521		$	2,429		$	2,753
Recovery of loan losses		( 1,208	)		( 831	)		( 1,142	)		( 965	)
Charge-offs		—			—			—			( 118	)
Recoveries		3			538			68			558
Net recoveries		3			538			68			440
Balance at end of period	$	1,355		$	2,228		$	1,355		$	2,228

-13-

Non-Commercial	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)

Balance, beginning of period	$	1,634		$	1,653		$	1,597		$	1,649
Recovery of loan losses		( 304	)		( 226	)		( 265	)		( 267	)
Charge-offs		( 28	)		( 13	)		( 52	)		( 41	)
Recoveries		4			28			26			101
Net (charge-offs) recoveries		( 24	)		15			( 26	)		60
Balance at end of period	$	1,306		$	1,442		$	1,306		$	1,442

Total	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)

Balance, beginning of period	$	4,194		$	4,174		$	4,026		$	4,402
Recovery of loan losses		( 1,512	)		( 1,057	)		( 1,407	)		( 1,232	)
Charge-offs		( 28	)		( 13	)		( 52	)		( 159	)
Recoveries		7			566			94			659
Net (charge-offs) recoveries		( 21	)		553			42			500
Balance at end of period	$	2,661		$	3,670		$	2,661		$	3,670

The following tables show period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2022 and December 31, 2021:

September 30, 2022	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	39	$	528	$	1,316	$	298,363	$	1,355	$	298,891
Non-Commercial		150		2,369		1,156		175,915		1,306		178,284
Total	$	189	$	2,897	$	2,472	$	474,278	$	2,661	$	477,175

December 31, 2021	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	102	$	2,573	$	2,327	$	269,876	$	2,429	$	272,449
Non-Commercial		112		2,135		1,485		146,195		1,597		148,330
Total	$	214	$	4,708	$	3,812	$	416,071	$	4,026	$	420,779

-14-

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, 2022	Loans 30-89 Days Past Due		Loans 90 Days or More Past Due and Non-accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)

Commercial	$	22	$	71	$	93	$	75,091	$	75,184	$	—
SBA Paycheck Protection Program (PPP)		20		—		20		594		614		—
Real estate - commercial		740		—		740		181,549		182,289		—
Other real estate construction		183		—		183		35,476		35,659		—
Real estate 1-4 family construction		—		—		—		6,505		6,505		—
Real estate - residential		139		102		241		104,256		104,497		—
Home equity		—		28		28		57,755		57,783		—
Consumer loans		24		—		24		9,475		9,499		—
Other loans		—		—		—		5,145		5,145		—
Total	$	1,128	$	201	$	1,329	$	475,846	$	477,175	$	—

December 31, 2021	Loans 30-89 Days Past Due		Loans 90 Days or More Past Due and Non-accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)

Commercial	$	201	$	310	$	511	$	72,524	$	73,035	$	—
SBA Paycheck Protection Program (PPP)		—		—		—		15,100		15,100		—
Real estate - commercial		127		292		419		150,124		150,543		—
Other real estate construction		—		—		—		28,275		28,275		—
Real estate 1-4 family construction		—		—		—		8,424		8,424		—
Real estate - residential		559		337		896		78,428		79,324		—
Home equity		—		33		33		50,970		51,003		—
Consumer loan		27		—		27		9,552		9,579		—
Other loans		—		—		—		5,496		5,496		—
Total	$	914	$	972	$	1,886	$	418,893	$	420,779	$	—

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

The Company had $ 0 in foreclosed residential real estate and $ 0 of residential real estate in process of foreclosure at September 30, 2022 and December 31, 2021.

The composition of non-accrual loans by class as of September 30, 2022 and December 31, 2021 was as follows:

	September 30, 2022		December 31, 2021
	(dollars in thousands)

Commercial	$	71	$	310
SBA Paycheck Protection Program (PPP)		—		—
Real estate - commercial		—		292
Other real estate construction		—		—
Real estate 1-4 family construction		—		—
Real estate - residential		102		337
Home equity		28		33
Consumer loans		—		—
Other loans		—		—
	$	201	$	972

-15-

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

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2022 and December 31, 2021:

September 30, 2022	Pass		Watch		Sub-standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	74,051	$	1,062	$	71	$	—	$	75,184
SBA Paycheck Protection Program (PPP)		614		—		—		—		614
Real estate - commercial		181,198		1,091		—		—		182,289
Other real estate construction		35,482		52		125		—		35,659
Real estate 1-4 family construction		6,505		—		—		—		6,505
Real estate - residential		101,925		2,079		493		—		104,497
Home equity		57,587		167		29		—		57,783
Consumer loans		9,455		44		—		—		9,499
Other loans		5,145		—		—		—		5,145
Total	$	471,962	$	4,495	$	718	$	—	$	477,175

December 31, 2021	Pass		Watch		Sub-standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	70,235	$	2,490	$	310	$	—	$	73,035
SBA Paycheck Protection Program (PPP)		15,100		—		—		—		15,100
Real estate - commercial		145,084		4,387		1,072		—		150,543
Other real estate construction		27,966		55		254		—		28,275
Real estate 1-4 family construction		8,424		—		—		—		8,424
Real estate - residential		76,430		2,157		737		—		79,324
Home equity		50,672		298		33		—		51,003
Consumer loans		9,538		41		—		—		9,579
Other loans		5,496		—		—		—		5,496
Total	$	408,945	$	9,428	$	2,406	$	—	$	420,779

-16-

Loans that are in non-accrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2022 and December 31, 2021 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, 2022 and December 31, 2021:

September 30, 2022	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	75,113	$	71	$	75,184
SBA Paycheck Protection Program (PPP)		614		—		614
Real estate - commercial		182,289		—		182,289
Other real estate construction		35,659		—		35,659
Real estate 1-4 family construction		6,505		—		6,505
Real estate - residential		104,395		102		104,497
Home equity		57,755		28		57,783
Consumer loans		9,499		—		9,499
Other loans		5,145		—		5,145
Total	$	476,974	$	201	$	477,175

December 31, 2021	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	72,725	$	310	$	73,035
SBA Paycheck Protection Program (PPP)		15,100		—		15,100
Real estate - commercial		150,251		292		150,543
Other real estate construction		28,275		—		28,275
Real estate 1-4 family construction		8,424		—		8,424
Real estate - residential		78,987		337		79,324
Home equity		50,970		33		51,003
Consumer loans		9,579		—		9,579
Other loans		5,496		—		5,496
Total	$	419,807	$	972	$	420,779

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, 2022 and December 31, 2021.

September 30, 2022	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)

Commercial	$	18	$	—	$	18	$	21
SBA Paycheck Protection Program (PPP)		—		—		—		—
Real estate - commercial		510		—		510		18
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		2,340		582		1,758		150
Home equity		29		29		—		—
Consumer loans		—		—		—		—
Other loans		—		—		—		—
Total	$	2,897	$	611	$	2,286	$	189

-17-

December 31, 2021	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)

Commercial	$	960	$	—	$	960	$	31
SBA Paycheck Protection Program (PPP)		—		—		—		—
Real estate - commercial		1,613		—		1,613		71
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		2,103		777		1,326		111
Home equity		32		2		30		1
Consumer loans		—		—		—		—
Other loans		—		—		—		—
Total	$	4,708	$	779	$	3,929	$	214

The table below shows interest income received on impaired loans by class for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)

Commercial	$	26	$	1	$	806	$	30
SBA Paycheck Protection Program (PPP)		—		—		—		—
Real estate - commercial		657		20		3,415		26
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		2,374		28		2,718		27
Home equity		45		—		234		—
Consumer loans		—		—		4		—
Other loans		—		—		—		—

Total	$	3,102	$	49	$	7,177	$	83

	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)

Commercial	$	497	$	30	$	728	$	42
SBA Paycheck Protection Program (PPP)		—		—		—		—
Real estate - commercial		1,024		54		3,500		81
Other real estate construction		—		—		260		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		2,192		118		2,755		99
Home equity		38		1		188		1
Consumer loans		—		—		8		—
Other loans		—		—		—		—
Total	$	3,751	$	203	$	7,439	$	223

-18-

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, 2022, the Company had $ 2.8 million in TDRs outstanding, of which one with a balance totaling $ 35,000 was on a non-accruing basis. Comparatively, the Company had $ 3.8 million of outstanding TDRs, of which one with a balance of $ 39,000 was on a non-accruing basis, at December 31, 2021.

For the three and nine months ended September 30, 2022 and 2021, the following tables present a breakdown of the types of concessions made by loan class. The Company made no concessions during the three months ended September 30, 2022.

	For the three months ended September 30, 2021
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Commercial		—	$	—	$	—
SBA Paycheck Protection Program (PPP)		—		—		—
Real estate - commercial		2		1,223		1,223
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate - residential		2		252		252
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
Total		4	$	1,475	$	1,475

	For the nine months ended September 30, 2022
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded 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		560		560
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
Total		1	$	560	$	560

-19-

	For the nine months ended September 30, 2021
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Commercial		1	$	648	$	648
SBA Paycheck Protection Program (PPP)		—		—		—
Real estate - commercial		2		1,223		1,223
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate - residential		3		468		468
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
Total		6	$	2,339	$	2,339

At September 30, 2022 and September 30, 2021, there were no 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 $ 168,000 in the allowance for loan losses as of September 30, 2022, as a direct result of these TDRs. At September 30, 2021, there was $ 149,000 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, 2022 and 2021:

	Paid In Full				Paying as restructured				Converted to non-accrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
September 30, 2022
Below market interest rate		1	$	219		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		—		—		—		—		—		—
Forgiveness of principal/other		4		1,558		2		988		—		—		—		—
Total		5	$	1,777		2	$	988		—	$	—		—	$	—

September 30, 2021
Below market interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		—		—		—		—		—		—
Forgiveness of principal/other		10		1,253		7		2,462		—		—		—		—
Total		10	$	1,253		7	$	2,462		—	$	—		—	$	—

Note 9 - Leases

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

-20-

Our leases relate to four office locations, three of which are branch locations, with remaining terms of four to seven years . Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of September 30, 2022, operating lease ROU assets were $ 2.0 million and the lease liability was $ 2.1 million, compared to ROU assets of $ 2.2 million and a lease liability of $ 2.3 million at September 30, 2021. Lease costs associated with all leases was $ 105,000 and $ 303,000 for the three and nine months ended September 30, 2022, respectively.

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

	Nine Months Ended September 30,
	2022			2021
	(in thousands except percent and period data)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	307		$	292
Right-of-use assets obtained in exchange for new operating lease liabilities		1,965			2,186
Weighted-average remaining lease term - operating leases, in years		5.1			6.1
Weighted-average discount rate - operating leases		2.53	%		2.46	%

The table below summarizes the maturity of remaining lease liabilities:


	September 30, 2022
	(in thousands)

2022	$	107
2023		435
2024		446
2025		455
2026		416
2027 and thereafter		377
Total lease payments		2,236
Less: Interest		( 149	)
Present value of lease liabilities		2,087

Note 10 - Commitments and Contingencies

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

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

At September 30, 2022 and December 31, 2021, outstanding financial instruments whose contract amounts represent credit risk were approximately:

	September 30, 2022		December 31, 2021
	(dollars in thousands)

Commitments to extend credit	$	170,664	$	177,706
Credit card commitments		20,370		19,763
Standby letters of credit		7,966		8,161
Total commitments	$	199,000	$	205,630

-21-

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

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

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

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

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

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

-22-

The following tables provide fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

	September 30, 2022
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	50,492	$	50,492	$	—	$	—
U.S. Government agencies		35,436		—		35,436		—
GSE - Mortgage-backed securities and CMO’s		114,354		—		114,354		—
Asset-backed securities		39,260		—		39,260		—
State and political subdivisions		76,414		—		76,414		—
Corporate bonds		5,426		—		5,426		—
Equity securities		321		321		—		—
Mortgage banking derivatives		799		—		799		—
Total assets at fair value on a recurring basis	$	322,502	$	50,813	$	271,689	$	—
Mortgage banking derivatives	$	220	$	—	$	29	$	191
Total liabilities at fair value on a recurring basis	$	220	$	—	$	29	$	191

	December 31, 2021
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	26,381	$	26,381	$	—	$	—
U.S. Government agencies		39,812		—		39,812		—
GSE - Mortgage-backed securities and CMO’s		120,448		—		120,448		—
Asset-backed securities		44,198		—		44,198		—
State and political subdivisions		89,477		—		89,477		—
Corporate bonds		10,021		—		10,021		—
Equity securities		392		392		—		—
Mortgage banking derivatives		1,269		—		253		1,016
Total assets at fair value on a recurring basis	$	331,998	$	26,773	$	304,209	$	1,016
Mortgage banking derivatives	$	50	$	—	$	50	$	—
Total liabilities at fair value on a recurring basis	$	50	$	—	$	50	$	—

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

	September 30, 2022
	(dollars in thousands)
	Mortgage banking derivatives: Interest rate lock commitments			Total
Balance at December 31, 2021	$	1,016		$	1,016
Change in fair value:
Included in income from mortgage banking		( 1,207	)		( 1,207	)
Balance at September 30, 2022	$	( 191	)	$	( 191	)

The fair value of mortgage IRLCs at September 30, 2022 was calculated based on a notional amount of $ 15.4 million. Significant unobservable inputs are used to determine the fair value of these derivatives. At September 30, 2022, such inputs included anticipated margins to be earned based on market movement from the original lock date and an overall projected pull-through rate of 91.38 % determined by loan product, loan stage, and loan purpose. The fair value of mortgage IRLCs at December 31, 2021 was calculated based on a notional amount of $ 28.9 million. Significant unobservable inputs were the same as those used for the nine months ended September 30, 2022 and assumed a projected pull-through rate of 82.47 % at December 31, 2021. Changes in interest rates and other assumptions could significantly change these estimated values.

-23-

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2022 and December 31, 2021:

	September 30, 2022
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	2,097	$	—	$	—	$	2,097
Total assets at fair value on a nonrecurring basis	$	2,097	$	—	$	—	$	2,097

	December 31, 2021
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	3,715	$	—	$	—	$	3,715
Total assets at fair value on a nonrecurring basis	$	3,715	$	—	$	—	$	3,715

Quantitative Information about Level 3 Fair Value Measurements

At September 30, 2022, impaired loans were being evaluated with discounted expected cash flows for performing TDRs and discounted appraisals were being used on collateral dependent loans.

Note 12 – Fair Values of Financial Instruments

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, 2022 and December 31, 2021 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.

-24-

The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2022 and December 31, 2021 :

September 30, 2022	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	153,218	$	153,218	$	153,218	$	—	$	—
Securities available for sale		321,382		321,382		50,492		270,890		—
Securities held to maturity		30,343		26,990		—		13,144		13,846
Equity securities		321		321		321		—		—
Loans held for investment, net		474,514		440,302		—		—		440,302
Loans held for sale		4,740		4,740		—		4,740		—
Restricted stock		1,428		1,428		1,428		—		—
Loan servicing rights		5,149		6,861		—		6,861		—
Mortgage banking derivatives		799		799		—		799		—
Accrued interest receivable		3,203		3,203		—		—		3,203
FINANCIAL LIABILITIES
Deposits	$	963,561		961,895		—		961,895		—
Short-term borrowings		1,103		1,103		—		1,103		—
Long-term borrowings		29,588		26,197		—		—		26,197
Mortgage banking derivatives		220		220		—		29		191
Accrued interest payable		70		70		—		—		70

December 31, 2021	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	94,410	$	94,357	$	90,924	$	3,433	$	—
Securities available for sale		330,337		330,337		—		330,337		—
Securities held to maturity		30,801		32,045		—		16,898		15,147
Equity securities		392		392		392		—		—
Loans held for investment, net		416,753		412,585		—		—		412,585
Loans held for sale		21,684		21,684		—		21,684		—
Restricted stock		921		921		921		—		—
Loan servicing rights		5,078		5,509		—		5,509		—
Mortgage banking derivatives		1,269		1,269		—		253		1,016
Accrued interest receivable		2,554		2,554		—		—		2,554
FINANCIAL LIABILITIES
Deposits	$	836,752	$	836,567	$	—	$	836,567	$	—
Short-term borrowings		1,081		1,081		—		1,081		—
Long-term borrowings		29,530		30,039		—		—		30,039
Mortgage banking derivatives		50		50		—		50		—
Accrued interest payable		7		7		—		—		7

At September 30, 2022 the Company’s subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 10.

-25-

Note 13 – Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. During 2019, the effective date was extended to fiscal years beginning on or after December 15, 2022 for public entities that qualify as smaller reporting companies, per the Securities and Exchange Commission definition, which currently includes the Company. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are engaged with a CECL-ready vendor who will process our CECL model. A methodology has been approved by management and our Board of Directors and is currently undergoing a validation to ensure compliance with CECL requirements. A parallel model was processed to compare to our June 30, 2022 current incurred loss model, and we will also process our September 30, 2022 data in the CECL model upon completion of a validation. This will allow us to understand the full financial impact of CECL adoption. 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.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, effective December 15, 2022. ASU 2022-02 eliminates the TDR accounting guidance set forth in Subtopic 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” for financial institutions that have already adopted the CECL standard. The update requires that an entity apply the loan refinancing and restructuring guidance in ASC 310-20, “Receivables – Nonrefundable Fees and Other Costs,” to determine whether a modification results in a new loan or a continuation of an existing loan. Enhanced qualitative and quantitative disclosures will be required for modifications made for borrowers experiencing financial difficulty. As of September 30, 2022, the Company had not yet adopted the CECL standard.

ASC 848, “Reference Rate Reform,” was set forth to eliminate certain reference rates and introduce new reference rates that are based on a larger, more liquid population of observable transactions that are less vulnerable to manipulation. The reference rate reform will discontinue the use of certain widely used reference rates such as the London Interbank Offered Rate, or LIBOR. In response to likely challenges arising from contract modifications due to reference rate reform, the FASB issued ASU 2020-04 in March 2020 to provide optional expedients and exceptions for applying GAAP to contract modifications. As such, modifications to debt contracts may be accounted for as a continuation of the existing contract by prospectively adjusting the effective interest rate. This amendment can be applied beginning March 12, 2020 and will sunset December 31, 2022. The Company currently holds, but no longer issues, loan contracts that reference LIBOR. The Company is evaluating the most effective manner in which to modify those contracts, but does not anticipate material financial impact.

From time to time the FASB issues exposure drafts of proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

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Note 14 – Mortgage Banking Derivatives

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

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

The Company also enters into purchase and sale agreements of to-be-announced mortgage-backed securities trades (TBAs). A TBA trade is a contract to buy or sell mortgage-backed securities on a specific date while the underlying mortgages are not announced until just prior to settlement. These TBA trades provide an economic hedge against the effect of changes in interest rates resulting from IRLCs. TBAs are accounted for as derivatives under FASB ASC 815 when either of the following conditions exist: (i) when settlement of the TBA trade is not expected to occur at the next regular settlement date (which is typically the next month) or (ii) a mechanism exists to settle the contract on a net basis. As a result, these instruments are recorded at fair value in the mortgage banking derivatives asset or liability with changes in fair value recorded in income from mortgage banking within the consolidated statement of income. The fair value of the TBA trades is based on the gain or loss that would occur if the Company were to pair-off the trade at the measurement date.

The following table reflects the notional amount and fair value of mortgage banking derivatives included in the balance sheet at fair value as of September 30, 2022 and December 31, 2021.

	Notional Amount		Fair Value
	(dollars in thousands)
Balance at September 30, 2022
Included in mortgage banking derivatives asset:
Interest rate lock commitments	$	—	$	—
Forward sales commitments		—		—
To-be-announced mortgage-backed securities trades		22,500		799
Included in mortgage banking derivatives liability:
Interest rate lock commitments		15,376		191
Forward sales commitments		3,704		29
To-be-announced mortgage-backed securities trades		—		—

Balance at December 31, 2021
Included in mortgage banking derivatives asset:
Interest rate lock commitments		28,939		1,016
Forward sales commitments		8,417		253
To-be-announced mortgage-backed securities trades		—		—
Included in mortgage banking derivatives liability:
Interest rate lock commitments		—		—
Forward sales commitments		—		—
To-be-announced mortgage-backed securities trades		44,000		50

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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, and its variants 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 and its broader economic effects, including labor shortages, supply chain issues, and inflation that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets due to COVID-19 or other factors; 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, 2022 and December 31, 2021.

During the nine months ended September 30, 2022, the Company’s total assets increased $99.0 million, from $939.7 million to $1.04 billion.

Cash and cash equivalents increased $58.8 million during the nine months ended September 30, 2022, from $94.4 million to $153.2 million. The increase is related to continued growth in deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $9.4 million to $351.7 million for the nine-month period ended September 30, 2022. At September 30, 2022, the Company had unrealized losses on securities available for sale of $44.2 million, compared to unrealized losses of $1.5 million at December 31, 2021. The significant decline in fair value is directly related to the increase in market interest rates at September 30, 2022 compared to December 31, 2021, as the U.S. Treasury yield curve reacts to substantial increases in the federal funds rate by the Federal Reserve.

At September 30, 2022, equity securities declined in value from $392,000 at December 31, 2021 to $321,000 as a result of the decline in value in the equity market.

Loans held for sale decreased 78.1%, or $16.9 million, as mortgage loan production has slowed during 2022 and many of the loans produced near the December 31, 2021 quarter-end date were not sold on the secondary market until 2022. Loans held for investment increased from $420.8 million to $477.2 million, an increase of $56.4 million for the nine-month period ended September 30, 2022. The Company experienced a net increase in all loan sectors with the exception of real estate 1-4 family construction, consumer loans, other loans and SBA PPP loans. SBA PPP loans were issued during 2020 and 2021 as a result of the federal government’s response to helping small businesses due to COVID-related issues. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA if the loans comply with PPP requirements.

The allowance for loan losses was $2.7 million at September 30, 2022, which represented 0.56% of the total loans held for investment, compared to $4.0 million or 0.96% of the total loans held for investment at December 31, 2021. Additional discussion regarding the allowance is included in the Asset Quality section below.

Other changes in our consolidated assets are primarily related to deferred tax assets, which increased $9.8 million from $1.7 million as of December 31, 2021 to $11.6 million at September 30, 2022 as a result of the significant decline in value of the available for sale security portfolio. Additionally, restricted stock increased $507,000 for the same period mainly due to the increase in FRB stock required to be held from increased common equity.

Customer deposits, our primary funding source, experienced a $126.8 million increase during the nine-month period ended September 30, 2022, increasing from $836.8 million to $963.6 million, a 15.2% increase. In addition to receipt of government grant funding by some depositors, a large portion of this increase is related to the overall growth in the number of deposit accounts and relationship sizes. As the banking subsidiary of the Company operates in a primarily rural market, many competitors have exited the markets where we remain, which has driven deposit growth in our current markets. Demand noninterest-bearing checking accounts increased $53.7 million, interest checking and money market accounts increased $76.6 million and savings deposits increased $3.7 million during the nine months ended September 30, 2022. Time deposits decreased by $7.2 million during the same period as customers transitioned to liquid accounts.

Total short-term borrowings increased $22,000 for the nine-month period ended September 30, 2022. At September 30, 2022, the Company had $29.6 million in long-term debt outstanding, which consists solely of its junior subordinated debt securities. During the third quarter of 2019, the Company issued $10.0 million in subordinated debt securities with a final maturity date of September 30,

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2029 that may be redeemed on or after September 30, 2024. This junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. During the third quarter of 2021, the Company issued $12.0 million and $8.0 million of 10-year and 15-year fixed-to-floating rate subordinated debt securities, respectively. The 10-year subordinated notes mature on September 3, 2031, though redeemable on or after September 3, 2026, and initially pay interest quarterly at an annual rate of 3.5%. From and including September 3, 2026 to but excluding September 3, 2031, or up to an early redemption date, the interest rate on the 10-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month secured overnight financing rate (“SOFR”), plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though redeemable on or after September 3, 2031, and initially pay interest quarterly at an annual rate of 4.0%. From and including September 3, 2031 to but excluding September 3, 2036, or up to an early redemption date, the interest rate on the 15-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month SOFR plus 292 basis points payable quarterly in arrears. The subordinated debt has been structured to qualify as and is included in the calculation of the Company’s Tier 2 capital. The Company also has a $3.0 million line of credit of which $3.0 million was available to use at September 30 , 2022.

Mortgage banking derivatives increased $170,000 from $50,000 at December 31, 2021 to $220,000 at September 30, 2022, because of the rise in interest rates since year-end. As rates rise, the value of mandatory mortgage forward sales commitments deteriorate, and the price required to exit out of the commitment decreases. Additionally, the value associated with IRLCs has depreciated to a liability position as market rates now exceed interest rates committed to borrowers. Other liabilities increased $237,000 from December 31, 2021 to September 30, 2022 primarily related to adjustments of reserves in order to align these accounts with current earnings.

At September 30, 2022, total shareholders’ equity was $32.5 million, a decrease of $28.3 million from December 31, 2021. This decline is a result of unrealized losses on investment securities, net of tax, increasing by $32.9 million as the yield curve continues to steepen. Net income for the nine-month period ended September 30, 2022 was $5.3 million. The Company repurchased 30,895 shares of common stock at a total cost of $268,000 during the first nine months of 2022. During the same period, the Company paid $422,000 in dividends attributable to noncontrolling interest. See Note 3 (Noncontrolling Interest) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.

Results of Operations for the Three Months Ended September 30, 2022 and 2021.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.8 million for the three months ended September 30, 2022, as compared to $2.7 million for the three months ended September 30, 2021, an increase of $141,000. Net income available to common shareholders was $2.7 million, or $0.38 per common share, for the three months ended September 30, 2022, compared to $2.5 million, or $0.35 per common share, at September 30, 2021. 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, 2022 was $7.2 million, compared to $7.0 million for the three months ended September 30, 2021, an increase of $230,000. During the third quarter of 2022, the average yield on our interest-earning assets decreased twenty basis points to 3.34% from the same period in 2021, and the average rate we paid for our interest-bearing liabilities increased twenty-four basis points to 0.50%. These changes resulted in a lower interest rate spread of 2.84% as of September 30, 2022, compared to 3.28% as of September 30, 2021. The Company’s net interest margin was 2.99% and 3.37% for the comparable periods in 2022 and 2021, respectively.

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The following table presents average balance sheet and a net interest income analysis for the three months ended September 30, 2022 and 2021:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2022		2021		2022		2021		2022			2021
Interest-earning assets:
Taxable securities	$	279,567	$	214,624	$	1,577	$	740		2.24	%		1.37	%
Non-taxable securities ⁽¹⁾		69,250		53,967		391		309		2.76	%		2.88	%
Short-term investments		147,782		120,014		725		53		1.95	%		0.18	%
Equity securities		327		411		5		5		6.07	%		4.83	%
Taxable loans		463,589		437,845		5,298		6,191		4.53	%		5.61	%
Non-taxable loans ⁽¹⁾		12,957		7,326		69		51		2.60	%		3.48	%
Total interest-earning assets		973,472		834,187		8,065		7,349		3.34	%		3.54	%
Interest-bearing liabilities:
Interest-bearing deposits		651,089		546,252		513		176		0.31	%		0.13	%
Short-term borrowed funds		1,111		1,167		2		1		0.71	%		0.34	%
Long-term debt		29,542		16,000		338		192		4.54	%		4.76	%
Total interest bearing liabilities		681,742		563,419		853		369		0.50	%		0.26	%
Net interest spread	$	291,730	$	270,768	$	7,212	$	6,980		2.84	%		3.28	%
Net interest margin ⁽¹⁾ (% of earning assets)										2.99	%		3.37	%

⁽¹⁾	Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision (Recovery) and Allowance for Loan Losses

The recovery of allowance for loan losses was $1.5 million for the three months ended September 30, 2022, compared to a recovery of $1.1 million for the same period in 2021. There were net loan chargeoffs of $21,000 for the three months ended September 30, 2022, as compared to net loan recoveries of $553,000 during the same period of 2021. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income decreased by $2.3 million for the three-month period ended September 30, 2022, as compared to the same period in 2021. Declines in market valuation adjustments on supplemental executive retirement plans contributed approximately $860,000 to this decrease. Another significant factor contributing to the overall change in noninterest income was a decrease of $1.5 million in income from mortgage banking. This decline is due to the significant reduction in production, particularly mortgage refinancing activity, as interest rates have risen steadily during 2022.

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,
	2022		2021
	(in thousands)
Income from debit card transactions	$	552	$	535
Income from credit card transactions		165		130
Gross interchange and transaction fee income		717		665
Network costs - debit card		246		249
Network costs - credit card		156		155
Total	$	315	$	261

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Noninterest Expense

Noninterest expense for the three months ended September 30, 2022 decreased by $1.8 million from the same period in 2021, to $7.4 million. Salaries and benefits, the largest component of noninterest expense, decreased $965,000 due to decreased commissions from reduced production in the mortgage division. As a result of production declines in the mortgage division, loan costs decreased by $100,000 to $92,000 for the three months ended September 30, 2022. Market valuation adjustments decreased the expense associated with supplemental executive retirement plans by $860,000.

Total other noninterest expense decreased $16,000 for the three months ended September 30, 2022, compared to the same period in 2021. The table below reflects the composition of other noninterest expense.

	Three Months Ended September 30,
	2022		2021
	(dollars in thousands)
Postage	$	48	$	47
Telephone and data lines		52		48
Office supplies and printing		30		25
Shareholder relations expense		31		58
Dues and subscriptions		69		80
Other		370		358
Total	$	600	$	616

Income Tax Expense

The Company had income tax expense of $737,000 for the three months ended September 30, 2022 at an effective tax rate of 20.7% compared to income tax expense of $732,000 with an effective tax rate of 21.4% in the comparable 2021 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance. For the three months ended September 30, 2022, the effective tax rate decreased due to the increase in tax-exempt security holdings .

Results of Operations for the Nine Months Ended September 30, 2022 and 2021.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $5.3 million for the nine months ended September 30, 2022, as compared to $8.9 million for the nine months ended September 30, 2021, a decrease of $3.6 million. Net income available to common shareholders was $4.9 million, or $0.69 per common share, for the nine months ended September 30, 2022, compared to $8.4 million, or $1.14 per common share, at September 30, 2021. 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, 2022 and 2021 was $19.8 million. During the first nine months of 2022, the average yield on our interest-earning assets decreased thirty-eight basis points to 3.14% from the same period in 2021, and the average rate we paid for our interest-bearing liabilities increased fourteen basis points to 0.39%. These changes resulted in a lower interest rate spread of 2.75% as of September 30, 2022, compared to 3.27% as of September 30, 2021. The Company’s net interest margin was 2.87% and 3.35% for the comparable periods in 2022 and 2021, respectively.

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The following table presents average balance sheet and a net interest income analysis for the nine months ended September 30 , 2022 and 2021:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2022		2021		2022		2021		2022			2021
Interest-earning assets:
Taxable securities	$	287,174	$	198,826	$	3,820	$	2,247		1.78	%		1.51	%
Non-taxable securities ⁽¹⁾		67,093		44,166		1,119		793		2.75	%		3.05	%
Short-term investments		118,856		95,128		1,012		96		1.14	%		0.13	%
Equity securities		367		511		15		15		5.46	%		3.92	%
Taxable loans		455,466		452,590		15,588		17,477		4.58	%		5.16	%
Non-taxable loans ⁽¹⁾		10,623		7,744		183		162		2.84	%		3.55	%
Total interest-earning assets		939,579		798,965		21,737		20,790		3.14	%		3.52	%
Interest-bearing liabilities:
Interest-bearing deposits		622,542		523,916		903		562		0.19	%		0.14	%
Short-term borrowed funds		1,109		1,345		3		3		0.36	%		0.30	%
Long-term debt		29,547		12,710		1,011		463		4.57	%		4.87	%
Total interest-bearing liabilities		653,198		537,971		1,917		1,028		0.39	%		0.26	%
Net interest spread	$	286,381	$	260,994	$	19,820	$	19,762		2.75	%		3.27	%
Net interest margin ⁽¹⁾ (% of earning assets)										2.87	%		3.35	%

⁽¹⁾	Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision (Recovery) and Allowance for Loan Losses

The recovery of allowance for loan losses was $1.4 million for the nine months ended September 30, 2022, compared to a recovery of $1.2 million for the same period in 2021. There were net loan recoveries of $42,000 for the nine months ended September 30, 2022, as compared to net loan recoveries of $500,000 during the same period of 2021. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income decreased by $8.7 million for the nine-month period ended September 30, 2022, as compared to the same period in 2021. The gain on sale of securities decreased $1.1 million to a loss of $91,000 at September 30, 2022 compared to a gain of $991,000 at September 30, 2021 as the Company worked to reduce the duration of the investment portfolio in an attempt to protect capital as long-term interest rates rise. Negative market adjustments of supplemental executive retirement plans contributed $1.8 million to the reduction in total noninterest income.

The primary factor contributing to the overall decline in noninterest income was a decrease of $6.2 million in income from mortgage banking. This decrease is due to the significant reduction in production, particularly mortgage refinancing activity, as interest rates have risen steadily during 2022.

	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Income from debit card transactions	$	1,635	$	1,563
Income from credit card transactions		465		373
Gross interchange and transaction fee income		2,100		1,936
Network costs - debit card		777		680
Network costs - credit card		467		437
Total	$	856	$	819

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Noninterest Expense

Noninterest expense for the nine months ended September 30, 2022 decreased by $3.8 million from the same period in 2021, to $21.8 million. Salaries and benefits, the largest component of noninterest expense, decreased $1.7 million due to decreased commissions from reduced production in the mortgage division. As a result of production declines in the mortgage division, volume-driven loan costs decreased by $333,000 to $356,000 for the nine months ended September 30, 2022. Marketing and donations decreased $138,000 to $898,000 for the same time period.

Total other noninterest expense increased $94,000 for the nine months ended September 30, 2022, compared to the same period in 2021. Increases in postage, business insurance, employee education and franchise tax expense contributed to this overall increase. The table below reflects the composition of other noninterest expense.

	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Postage	$	165	$	150
Telephone and data lines		157		146
Office supplies and printing		73		77
Shareholder relations expense		104		130
Dues and subscriptions		219		286
Other		1,071		906
Total	$	1,789	$	1,695

Income Tax Expense

The Company had income tax expense of $1.2 million for the nine months ended September 30, 2022 at an effective tax rate of 18.6% compared to income tax expense of $2.4 million with an effective tax rate of 21.2% in the comparable 2021 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance. For the nine months ended September 30, 2022, the effective tax rate decreased due to the increase in tax-exempt security holdings .

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions; and other relevant factors. The Company’s credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

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

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

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a reserve for qualitative factors based on current economic conditions determined at management’s discretion , 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 2022, the average effective credit score of the portfolio, excluding loans in default, increased slightly from 767 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 COVID-19, are the type of future events that often cause material adjustments to the allowance to be necessary. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition, results of operations and the value of its securities.

At September 30, 2022, the level of our impaired loans, which includes all loans in non-accrual status, TDRs, and other loans deemed by management to be impaired, was $2.9 million, compared to $4.7 million at December 31, 2021, a net decrease of $1.8 million. The decrease is related to two large relationships paying off during 2022. Total non-accrual loans, which are a component of impaired loans, decreased from $972,000 at December 31, 2021 to $201,000 at September 30, 2022. During the first nine months of 2022, three loans totaling $610,000 were added to impaired loans; however, ten loans totaling $2.3 million were paid off. We also received net pay downs of $148,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased forty basis points from 0.96% at December 31, 2021 to 0.56% at September 30, 2022. The collectively evaluated allowance as a percentage of collectively evaluated loans was 0.92% at December 31, 2021 and 0.52% at September 30, 2022. The decrease is attributable to continued improvement in probability of defaults of the portfolio as impacted by external economic factors. In December 2019, prior to the global COVID-19 pandemic, our collectively evaluated allowance as a percentage of collectively evaluated loans was 0.55%. Due to COVID-19 impacts to the global economy and the uncertainty within our economic markets, our allowance for loan loss model indicated a need for additional reserves due to external factors that are more likely to indicate losses for the loan portfolio. By the end of 2020, the collectively evaluated allowance as a percentage of collectively evaluated loans increased nearly double to 0.94%. The model results as of September 30, 2022 reflect the Company’s risk in the loan portfolio based on economic indicators of default applicable to our loan portfolio, primarily associated with NC unemployment and the NC-Charlotte region Case Shiller index. Signs of asset quality improvements are evident of support for reduced reserves as impaired loans fell to an all-time low of $2.9 million at September 30, 2022 and non-accrual loans fell to their all-time low of $201 thousand. The individually evaluated allowance as a percentage of individually evaluated loans increased from 4.54% to 6.53% for the same periods, mainly due to the payoff of one large relationship with little reserves associated due to collateral values.

The ratio of nonperforming loans, which consists of non-accrual loans and loans past due 90 days and still accruing, to total loans decreased from 0.23% at December 31, 2021 to 0.04% at September 30, 2022, and was related to six nonaccrual relationships that were paid off during 2022.

Troubled debt restructured loans, included in impaired loans, totaled $2.8 million at September 30, 2022 and $3.8 million at December 31, 2021. At September 30, 2022, there was one troubled debt restructured loan in non-accrual status, which had a balance of $35,000.

Other real estate owned remained at $0 through September 30, 2022, as there were no loans foreclosed on during the first nine months of 2022.

As of September 30, 2022, management believed the level of the allowance for loan losses was appropriate in light of the risk inherent in the loan portfolio.

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The following table shows the comparison of nonperforming assets at September 30, 2022 and December 31, 2021 :

Nonperforming Assets

(dollars in thousands)

	September 30, 2022			December 31, 2021
Nonperforming assets:
Accruing loans past due 90 days or more	$	—		$	—
Non-accrual loans		201			972
Other real estate owned		—			—
Total nonperforming assets	$	201		$	972
Allowance for loans losses	$	2,661		$	4,026
Nonaccrual loans to total loans		0.04	%		0.23	%
Allowance for loan losses to total loans		0.56	%		0.96	%
Allowance for loan losses to nonaccrual loans		1323.88	%		414.20	%

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. At September 30, 2022, these sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $38.0 million, with available credit of $38.0 million; an established borrowing relationship with the Federal Home Loan Bank, with available credit of $115.2 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $17.6 million and the issuance of commercial paper. The Company also has a $3.0 million line of credit with TIB The Independent BankersBank, N.A. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of September 30, 2022, $3.0 million remained available for use on the line of credit. The Company has also secured long-term debt from other sources consisting of $29.5 million of junior subordinated debt at both September 30, 2022 and December 31, 2021.

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

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

As of September 30, 2022, 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, 2022, the Company had $29.5 million in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.

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Off-Balance Sheet Arrangements

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

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through September 30, 2022, with the exception of mortgage banking derivatives. See Note 14 (Mortgage Banking Derivatives) to the Company’s Notes to Consolidated Financial Statements for additional discussion of mortgage banking derivatives.

Contractual Obligations

The timing and amount of our contractual obligations has not changed materially since our 2021 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 9, 2022.

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 2022. 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.

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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.

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, 2022.

	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program ⁽¹⁾		(d) Maximum Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Plans
July 1, 2022 Through July 31, 2022		—	$	—		—	$	—
August 1, 2022 Through August 31, 2022		—	$	—		—	$	—
September 1, 2022 Through September 30, 2022		2,056	$	7.00		—	$	—
Total		2,056	$	7.00		—	$	—

⁽¹⁾ Trades of the Company’s common stock are quoted on the OTCQX Market from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows.

Item 3.

Defaults Upon Senior Securities.

None.

Ite m 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 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, 2022, in inline XBRL (eXtensible Business Reporting Language) (filed herewith)
104		Cover page interactive data file (formatted in inline XBRL and contained in Exhibit 101)

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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 8, 2022	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date:	November 8, 2022	By:	/s/ Heather H. Almond
		Heather H. Almond
		Principal Financial Officer

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TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Note 1 Basis Of Presentation Note 2 Comprehensive Income (loss)Note 3 Noncontrolling Interest Note 4 Per Share Data Note 5 Investment and Equity Securities Note 6 Loans Held For Investment Note 7 Allowance For Loan Losses Note 8 Troubled Debt Restructures Note 9 - Leases Note 10 - Commitments and Contingencies Note 11 Fair Value Disclosures Note 12 Fair Values Of Financial Instruments Note 13 Recent Accounting Pronouncements Note 14 Mortgage Banking Derivatives Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

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)

September 30, 2022

Valuation Technique

Unobservable Input

General

Range

Nonrecurring measurements:

Impaired loans

Discounted appraisals

Collateral discounts and estimated costs to sell

Discounted cash flows

Discount rates