UWHR 10-Q Quarterly Report Sept. 30, 2023

UWHR 10-Q Quarter ended Sept. 30, 2023

Exhibits

Exhibits

UWHARRIE CAPITAL CORP

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10-Q

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, 2023


☐	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: 7,028,454 shares of common stock outstanding as of November 3, 2023.

Table of Contents


		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)	2

	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	2

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022	3

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	6

	Notes to Consolidated Financial Statements	7

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4 -	Controls and Procedures	39

Part II.	OTHER INFORMATION	40

Item 1 -	Legal Proceedings	40

Item 1A -	Risk Factors	40

Item 2 -	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	40

Item 3 -	Defaults Upon Senior Securities	40

Item 4 -	Mine Safety Disclosures	40

Item 5 -	Other Information	40

Item 6 -	Exhibits	41

	Signatures	42

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financia l Information

Item 1. Financ ial Statements.


	September 30, 2023 (Unaudited)			December 31, 2022*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	9,463		$	5,357
Interest-earning deposits with banks		68,407			109,224
Cash and cash equivalents		77,870			114,581
Securities available for sale, at fair value (amortized cost $ 374,686 and $ 365,936 , respectively)		328,099			324,683
Securities held to maturity, at amortized cost (fair value $ 24,807 and $ 27,178 , respectively)		29,146			30,306
Less allowance for credit losses on securities held to maturity		( 65	)		—
Net securities held to maturity		29,081			30,306
Equity security, at fair value		299			292
Loans held for sale		4,584			2,774
Loans held for investment		578,835			497,889
Less allowance for credit losses on loans		( 5,115	)		( 2,290	)
Net loans held for investment		573,720			495,599
Premises and equipment, net		15,172			14,735
Interest receivable		4,313			3,633
Restricted stock		1,672			1,428
Bank-owned life insurance		7,756			7,652
Deferred income tax benefit		12,512			10,726
Loan servicing assets		4,431			4,931
Mortgage banking derivatives		711			—
Other assets		9,582			8,150
Total assets	$	1,069,802		$	1,019,490

LIABILITIES
Deposits:
Demand noninterest-bearing	$	276,484		$	261,882
Interest checking and money market accounts		435,289			486,548
Savings deposits		103,953			104,301
Time deposits, $250,000 and over		70,026			35,979
Other time deposits		104,537			51,146
Total deposits		990,289			939,856
Short-term borrowed funds		931			1,044
Long-term debt		29,085			29,607
Mortgage banking derivatives		—			175
Other liabilities		12,427			11,411
Total liabilities		1,032,732			982,093

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 7,049,510 and 7,075,125 at September 30, 2023 and December 31, 2022, respectively		8,812			8,844
Common stock dividend distributable		176			—
Additional paid-in capital		13,331			12,633
Undivided profits		39,980			37,030
Accumulated other comprehensive loss		( 35,884	)		( 31,765	)
Total Uwharrie Capital Corp shareholders’ equity		26,415			26,742
Noncontrolling interest		10,655			10,655
Total shareholders’ equity		37,070			37,397
Total liabilities and shareholders’ equity	$	1,069,802		$	1,019,490

(*) Derived from audited consolidated financial statements

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	7,645		$	5,367		$	21,001		$	15,771
Investment securities
Investment securities, taxable		2,764			1,577			7,879			3,820
Investment securities, non-taxable		317			391			1,010			1,119
Equity Securities		5			5			15			15
Interest-earning deposits with banks and federal funds sold		979			725			3,230			1,012
Total interest income		11,710			8,065			33,135			21,737
Interest Expense
Interest checking and money market accounts		1,564			434			4,471			693
Savings deposits		120			20			288			57
Time deposits, $250,000 and over		723			25			1,515			53
Other time deposits		781			34			1,742			100
Short-term borrowed funds		11			2			30			3
Long-term debt		334			338			1,000			1,011
Total interest expense		3,533			853			9,046			1,917
Net interest income		8,177			7,212			24,089			19,820
Provision for (recovery of) credit losses		599			( 1,512	)		985			( 1,407	)
Net interest income after provision for (recovery of) credit losses		7,578			8,724			23,104			21,227

Noninterest Income
Service charges on deposit accounts		272			282			785			786
Other service fees and commissions		875			763			2,586			2,465
Interchange and card transaction fees, net		291			315			910			856
Loss on sale of securities		—			—			( 42	)		( 91	)
Realized/unrealized gain (loss) on equity securities		( 4	)		( 6	)		7			( 71	)
Income from mortgage banking		957			819			2,542			3,258
Supplemental executive retirement plan loss		( 20	)		( 74	)		( 38	)		( 626	)
Other income		148			139			437			542
Total noninterest income		2,519			2,238			7,187			7,119
Noninterest Expense
Salaries and employee benefits		4,822			4,868			14,498			14,796
Net occupancy expense		460			424			1,345			1,276
Equipment expense		195			199			578			580
Data processing costs		103			204			511			610
Loan costs		88			92			286			356
Professional fees and services		268			217			705			633
Marketing and donations		313			359			1,037			898
Electronic banking expense		140			123			410			351
Software amortization and maintenance		311			304			914			923
FDIC insurance		119			84			353			237
Supplemental executive retirement plan loss		( 20	)		( 74	)		( 38	)		( 626	)
Other noninterest expense		591			600			1,758			1,789
Total noninterest expense		7,390			7,400			22,357			21,823
Income before income taxes		2,707			3,562			7,934			6,523
Income taxes		558			737			1,608			1,215
Net income	$	2,149		$	2,825		$	6,326		$	5,308
Consolidated net income	$	2,149		$	2,825		$	6,326		$	5,308
Less: net income attributable to noncontrolling interest		( 142	)		( 142	)		( 422	)		( 422	)
Net income attributable to Uwharrie Capital Corp and common shareholders		2,007			2,683			5,904			4,886
Net income per common share
Basic	$	0.28		$	0.37		$	0.82		$	0.67
Diluted	$	0.28		$	0.37		$	0.82		$	0.67
Weighted average shares outstanding
Basic		7,196,706			7,245,951			7,209,426			7,253,349
Diluted		7,196,706			7,245,951			7,209,426			7,253,349

See accompanying notes

Uw harrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(dollars in thousands)

Net income	$	2,149		$	2,825		$	6,326		$	5,308

Unrealized loss on available for sale securities		( 8,351	)		( 12,158	)		( 5,376	)		( 42,836	)
Related tax effect		1,918			2,796			1,223			9,849
Reclassification of loss recognized in net income		—			—			42			91
Related tax effect		—			—			( 8	)		( 17	)

Total other comprehensive loss		( 6,433	)		( 9,362	)		( 4,119	)		( 32,913	)

Comprehensive income (loss)		( 4,284	)		( 6,537	)		2,207			( 27,605	)

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

Comprehensive income (loss) attributable to Uwharrie Capital Corp	$	( 4,426	)	$	( 6,679	)	$	1,785		$	( 28,027	)

See accompanying notes

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 Loss			Non Controlling Interest			Total
	(dollars in thousands, except share data)
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

Balance, June 30, 2023		7,057,847		$	8,823		$	—	$	12,521		$	39,012		$	( 29,451	)	$	10,655		$	41,560
Net Income		—			—			—		—			2,007			—			142			2,149
2 % stock dividend declaration		—			—			176		863			( 1,039	)		—			—			—
Repurchase and retirement of common stock		( 8,337	)		( 11	)		—		( 53	)		—			—			—			( 64	)
Other comprehensive loss		—			—			—		—			—			( 6,433	)		—			( 6,433	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 105	)		( 105	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 37	)		( 37	)
Balance, September 30, 2023		7,049,510		$	8,812		$	176	$	13,331		$	39,980		$	( 35,884	)	$	10,655		$	37,070


	Number of Common Shares Issued			Common Stock			Common Stock Dividend Distributable		Additional Paid-in Capital			Undivided Profits			Accumulated Other Comprehensive Loss			Non Controlling Interest			Total
	(dollars in thousands, except share data)
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

Balance, December 31, 2022		7,075,125		$	8,844		$	—	$	12,633		$	37,030		$	( 31,765	)	$	10,655		$	37,397
Cumulative effect of change in accounting principle		—			—			—		—			( 1,915	)		—			—			( 1,915	)
Net Income		—			—			—		—			5,904			—			422			6,326
2 % stock dividend declaration		—			—			176		863			( 1,039	)		—			—			—
Repurchase and retirement of common stock		( 25,615	)		( 32	)		—		( 165	)		—			—			—			( 197	)
Other comprehensive loss		—			—			—		—			—			( 4,119	)		—			( 4,119	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—		—			—			—			( 311	)		( 311	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—		—			—			—			( 111	)		( 111	)
Balance, September 30, 2023		7,049,510		$	8,812		$	176	$	13,331		$	39,980		$	( 35,884	)	$	10,655		$	37,070

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
	2023			2022
	(dollars in thousands)
Cash flows from operating activities
Net income	$	6,326		$	5,308
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		828			860
Right of use asset amortization		282			263
Provision for (recovery of) credit losses		985			( 1,407	)
Loss on sale of securities available for sale		42			91
Gain on sale of premises and equipment		( 70	)		( 152	)
Gain on sale of mortgage loans		( 690	)		( 2,341	)
Realized/unrealized (gain) loss on equity securities		( 7	)		71
Net amortization of premium on investment securities available for sale		1,430			2,074
Net amortization of premium on investment securities held to maturity		107			111
Amortization of loan servicing rights		933			1,019
Originations and purchases of mortgage loans for sale		( 60,803	)		( 102,337	)
Proceeds from sales of mortgage loans for sale		59,683			121,622
Mortgage banking derivatives		( 886	)		640
Loan servicing assets		( 432	)		( 1,090	)
Accrued interest receivable		( 680	)		( 649	)
Prepaid assets		( 523	)		( 56	)
Cash surrender value of life insurance		( 104	)		( 89	)
Miscellaneous other assets		( 469	)		1,181
Accrued interest payable		219			63
Miscellaneous other liabilities		788			46
Net cash provided by operating activities		6,959			25,228
Cash flows from investing activities
Proceeds from sales of investment securities available for sale		11,329			8,398
Proceeds from maturities, calls and paydowns of securities available for sale		19,833			32,304
Proceeds from maturities, calls and paydowns of securities held to maturity		1,053			347
Purchase of investment securities available for sale		( 41,384	)		( 76,657	)
Purchase of investments in other assets		( 300	)		( 409	)
Net change in restricted stock		( 244	)		( 507	)
Net increase in loans		( 81,659	)		( 56,354	)
Purchase of premises and equipment		( 1,497	)		( 228	)
Proceeds from sale of premises and equipment		78			545
Net cash used by investing activities		( 92,791	)		( 92,561	)
Cash flows from financing activities
Net increase in deposit accounts		50,433			126,809
Net increase (decrease) in federal funds purchased and other short-term borrowings		( 113	)		22
Repayment of long-term borrowings		( 580	)		—
Repurchase of common stock, net		( 197	)		( 268	)
Dividends paid on preferred stock (noncontrolling interest)		( 422	)		( 422	)
Net cash provided by financing activities		49,121			126,141
Increase (decrease) in cash and cash equivalents		( 36,711	)		58,808
Cash and cash equivalents, beginning of period		114,581			94,410
Cash and cash equivalents, end of period	$	77,870		$	153,218
Supplemental disclosures of cash flow information
Interest paid	$	8,764		$	1,792
Income taxes paid		1,762			1,217
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax	$	( 4,119	)	$	( 32,913	)
Initial ROU asset for leased properties		—			128
Initial lease liability for leased properties		—			126
Loans transferred to foreclosed real estate		142			—

See accompanying notes

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financ ial 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 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 8, 2023. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Accounting Changes and Reclassifications

Certain amounts in the 2022 financial statements have been reclassified to conform to the 2023 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements for the year ended December 31, 2022 and are contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

On January 1, 2023 , the Company adopted Accounting Standards Update (“ASU”) 2016-13 , “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held to maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities.

In concurrence with the adoption of CECL, the Company also adopted ASU 2022-02 , “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”) effective January 1, 2023 . The amendments in ASU 2022-02 enhanced disclosures for loan modifications made for borrowers experiencing financial difficulty and eliminated the Troubled Debt Restructurings (“TDR”) accounting guidance for financial institutions that have adopted CECL. See Note 8 (Modifications to Borrowers Experiencing Financial Difficulty) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the adoption of ASU 2022-02.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition

adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $ 2.41 million, which is presented as a reduction to net loans held for investment, and an increase in the allowance for credit losses on unfunded loan commitments of $ 9,000 , which is recorded within Other Liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $ 70,000 , which is presented as a reduction to securities held to maturity. The Company recorded a net decrease to retained earnings of $ 1.9 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). As a practical expedient, the Company has excluded interest receivable from the credit loss analysis under CECL for all applicable financial instruments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not necessary.


Allowance for credit losses	January 1, 2023 As Reported Under ASC 326		December 31, 2022 Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
	(dollars in thousands)
Assets
Securities held to maturity
State and political subdivisions	$	3	$	—	$	3
Corporate bonds		67		—		67
Securities held to maturity, total		70		—		70

Loans held for investment
Commercial		1,137		435		702
Real estate - commercial		1,777		760		1,017
Other real estate construction		306		177		129
Real estate 1-4 family construction		14		—		14
Real estate - residential		635		561		74
Home equity		652		277		375
Consumer loans		167		76		91
Other loans		9		4		5
Loans held for investment, total		4,697		2,290		2,407

Liabilities
Allowance for credit losses for unfunded commitments		150		141		9

Total	$	4,917	$	2,431	$	2,486

Allowance for Credit Losses – Available for Sale Securities

Management evaluates all available for sale securities in an unrealized loss position on a quarterly basis, or more frequently if economic or market conditions warrant. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the length of time and extent to which the security has been in a loss position, performance of any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled principal or interest payments and adverse conditions specifically related to the security. If the evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to

the available for sale portfolio. Accrued interest receivable on available for sale debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $ 2.2 million at September 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $ 392,000 at September 30, 2023 and was excluded from the estimate of credit losses.

The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Management classifies the held to maturity portfolio into the following major security types: U.S. government agencies, state and political subdivisions and corporate bonds. All of the U.S. government agency securities are issued by government-sponsored agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. As a result, no allowance for credit losses was recorded for these securities at September 30, 2023. The state and political subdivisions securities held by the Company are highly rated by major rating agencies. As such, there was minimal allowance for credit losses recorded at September 30, 2023 for state and political subdivisions securities.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified segments for Consumer loans based on credit score and collateral and for Commercial loans based on risk grade and collateral. The allowance for credit losses for each segment is calculated using a Non-Discounted Cash Flow methodology. The Non-Discounted Cash Flow methodology incorporates macroeconomic forecasts to project expected losses. Significant macroeconomic factors used in estimating the expected losses include the National Unemployment Rate and the 10 -Year T-Bill. A third-party forecast is utilized to project defaults for two years followed by a one year reversion period to the historical long run average economic forecast for the remainder of the portfolio life.

The Company individually reviews loans that are experiencing financial difficulty with total relationship exposure greater than or equal to $ 100,000 that are determined to be collateral dependent. These collateral dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.

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

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

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 loss for the three and nine months ended September 30, 2023 and 2022:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
	(dollars in thousands)

Beginning balance	$	( 29,451	)	$	( 24,702	)	$	( 31,765	)	$	( 1,151	)

Other comprehensive loss before reclassifications, net of $ 1,918 , $ 2,796 , $ 1,223 and $ 9,849 tax effect, respectively		( 6,433	)		( 9,362	)		( 4,153	)		( 32,987	)

Amounts reclassified from accumulated other comprehensive loss, net of $ 0 , $ 0 , ($ 8 ) and ($ 17 ) tax effect, respectively		—			—			34			74

Net current-period other comprehensive loss		( 6,433	)		( 9,362	)		( 4,119	)		( 32,913	)

Ending balance	$	( 35,884	)	$	( 34,064	)	$	( 35,884	)	$	( 34,064	)

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 17, 2023 , the Company's Board of Directors declared a 2 % stock dividend payable November 21, 2023 to shareholders of record on November 7, 2023 . All information in the accompanying 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 2022 periods have also been adjusted for the 2.5 % stock dividend declared on October 18, 2022 .

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, 2023 or December 31, 2022.

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 7,196,706 for the three-month period ended September 30, 2023 compared to 7,245,951 for the three-month period ended September 30, 2022. For the nine-month period ended September 30, 2023 , the weighted average number of common shares outstanding was 7,209,426 compared to 7,253,349 for the nine-month period ended September 30, 2022 .

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, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	54,974	$	—	$	4,740	$	50,234
U.S. government agencies		46,813		92		1,162		45,743
GSE - Mortgage-backed securities and CMOs		138,465		—		18,505		119,960
Asset-backed securities		32,656		309		273		32,692
State and political subdivisions		95,778		—		21,752		74,026
Corporate bonds		6,000		—		556		5,444
Total securities available for sale	$	374,686	$	401	$	46,988	$	328,099


September 30, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Allowance for Credit Losses
	(dollars in thousands)
Securities held to maturity
U.S. government agencies	$	133	$	—	$	1	$	132	$	—
State and political subdivisions		14,013		—		2,222		11,791		—
Corporate bonds		15,000		—		2,116		12,884		65
Total securities held to maturity	$	29,146	$	—	$	4,339	$	24,807	$	65


December 31, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	54,948	$	—	$	4,318	$	50,630
U.S. government agencies		34,746		64		1,048		33,762
GSE - Mortgage-backed securities and CMOs		132,059		—		16,064		115,995
Asset-backed securities		37,228		70		612		36,686
State and political subdivisions		100,955		—		18,689		82,266
Corporate bonds		6,000		—		656		5,344
Total securities available for sale	$	365,936	$	134	$	41,387	$	324,683


December 31, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. government agencies	$	152	$	—	$	5	$	147
State and political subdivisions		15,154		—		1,775		13,379
Corporate bonds		15,000		—		1,348		13,652
Total securities held to maturity	$	30,306	$	—	$	3,128	$	27,178

The Company owned Federal Reserve Bank (FRB) stock reported at cost of $ 959,000 at September 30, 2023 and December 31, 2022 . The Company owned Federal Home Loan Bank (FHLB) stock reported at cost of $ 712,000 and $ 469,000 at September 30, 2023 and December 31, 2022, 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, 2023.

There is no allowance for credit losses on available for sale securities. The following table shows a rollforward of the allowance for credit losses on held to maturity securities for the nine months ended September 30, 2023 .


	U.S. government agencies		State and political subdivisions			Corporate bonds
	(dollars in thousands)

Balance, December 31, 2022	$	—	$	—		$	—
Cumulative effect of change in accounting principle		—		3			67
Recovery of credit losses		—		( 3	)		( 2	)
Charge-offs of securities		—		—			—
Recoveries		—		—			—
Balance, September 30, 2023	$	—	$	—		$	65

On a quarterly basis, the Company monitors the credit quality of the debt securities held to maturity through the use of credit ratings. For unrated securities, primarily corporate bonds consisting of subordinated debt of bank holding companies, individual financial reports are reviewed quarterly. Capital, profitability, liquidity and other ratios are reviewed to assist in determining credit quality. U.S. government agency bonds are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses.

The following table summarizes the credit ratings of debt securities held to maturity, presented at amortized cost, by major security type at September 30, 2023 .


September 30, 2023	U.S. government agencies		State and political subdivisions		Corporate bonds		Total
	(dollars in thousands)
Aaa	$	—	$	1,161	$	—	$	1,161
Aa1/Aa2/Aa3		—		12,852		—		12,852
A1/A2		—		—		—		—
BBB		—		—		—		—
Not rated		133		—		15,000		15,133
Total	$	133	$	14,013	$	15,000	$	29,146

At September 30, 2023 , the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the nine months ended September 30, 2023.

Results from sales of securities available for sale for the three and nine-month periods ended September 30, 2023 and 2022, respectively, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023			2022
	(dollars in thousands)
Gross proceeds from sales	$	—	$	—	$	11,329		$	8,398

Realized gains from sales	$	—	$	—	$	54		$	52
Realized losses from sales		—		—		( 96	)		( 143	)
Net realized losses	$	—	$	—	$	( 42	)	$	( 91	)

At September 30, 2023 and December 31, 2022 , securities available for sale with a carrying amount of $ 151.0 million and $ 153.3 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

We believe the unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments. The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance has not been recorded aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023.


	Less than 12 Months						12 Months or More						Total
September 30, 2023	Number of Securities		Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities available for sale
U.S. Treasury		—	$	—	$	—		9	$	50,234	$	4,740	$	50,234	$	4,740
U.S. government agencies		11		17,131		101		18		15,571		1,061		32,702		1,162
GSE-Mortgage-backed securities and CMOs		8		16,565		537		60		101,515		17,968		118,080		18,505
Asset-backed securities		1		666		2		9		13,511		271		14,177		273
State and political subdivisions		7		9,500		777		56		64,210		20,975		73,710		21,752
Corporate bonds		—		—		—		3		5,444		556		5,444		556
Total securities available for sale		27	$	43,862	$	1,417		155	$	250,485	$	45,571	$	294,347	$	46,988

The following tables show the gross unrealized losses and estimated fair value of available for sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022.


	Less than 12 Months						12 Months or More						Total
December 31, 2022	Number of Securities		Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities available for sale
U.S. Treasury		4	$	27,991	$	509		5	$	22,639	$	3,809	$	50,630	$	4,318
U.S. government agencies		6		8,580		69		14		13,994		979		22,574		1,048
GSE-Mortgage-backed securities and CMOs		28		35,657		2,021		34		77,799		14,043		113,456		16,064
Asset-backed securities		12		22,828		315		5		7,326		297		30,154		612
State and political subdivisions		14		19,381		688		50		61,359		18,001		80,740		18,689
Corporate bonds		—		—		—		3		5,344		656		5,344		656
Total securities available for sale		64	$	114,437	$	3,602		111	$	188,461	$	37,785	$	302,898	$	41,387


	Less than 12 Months						12 Months or More						Total
December 31, 2022	Number of Securities		Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities held to maturity
U.S. government agencies		1	$	147	$	5		—	$	—	$	—	$	147	$	5
State and political subdivisions		9		12,354		1,621		1		1,025		154		13,379		1,775
Corporate bonds		4		6,383		367		10		7,269		981		13,652		1,348
Total securities held to maturity		14	$	18,884	$	1,993		11	$	8,294	$	1,135	$	27,178	$	3,128

Declines in the fair value of the available for sale investment portfolio are believed by management to be temporary in nature. When evaluating an investment for credit losses, 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 through the review of credit ratings and, if necessary, corporate financial statements; adverse conditions specifically related to the security such as past due principal or interest; underlying assets that collateralize the debt security; other economic conditions and demographics; and the intent and 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, 2023, 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, 2023:


	September 30, 2023
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities available for sale

Due within twelve months		25,974		25,677		4.72	%
Due after one but within five years		34,202		30,921		2.16	%
Due after five but within ten years		79,717		68,298		2.36	%
Due after ten years		234,793		203,203		3.54	%
	$	374,686	$	328,099		3.24	%


	September 30, 2023
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities held to maturity

Due within twelve months		1,025		1,016		2.83	%
Due after one but within five years		—		—		—
Due after five but within ten years		18,852		16,206		4.17	%
Due after ten years		9,269		7,585		3.50	%
	$	29,146	$	24,807		3.91	%

The portion of unrealized gains and losses for the three and nine months ended September 30, 2023 and 2022 related to equity securities still held at the reporting date is calculated as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023		2022
	(dollars in thousands)
Gross proceeds from sales	$	—		$	—		$	—	$	—

Net gains (losses) recognized during the period on equity securities	$	( 4	)	$	( 6	)	$	7	$	( 71	)
Less: Net gains (losses) recognized from equity securities sold during the period		—			—			—		—
Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date	$	( 4	)	$	( 6	)	$	7	$	( 71	)

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2023 and December 31, 2022 was as follows:


	September 30, 2023			December 31, 2022
	(dollars in thousands)
Commercial
Commercial	$	97,864		$	85,917
SBA Paycheck Protection Program (PPP)		215			545
Real estate - commercial		211,933			183,550
Other real estate construction loans		44,091			37,077
Other loans		6,326			6,666
Noncommercial
Real estate 1-4 family construction		12,171			6,613
Real estate - residential		133,957			108,669
Home equity		59,954			58,186
Consumer loans		11,488			9,762
		577,999			496,985
Less:
Allowance for credit losses		( 5,115	)		( 2,290	)
Deferred loan costs net		836			904

Loans held for investment, net	$	573,720		$	495,599

Note 7 – Allowance for Credit Losses on Loans

The following tables summarize the activity related to the allowance for credit losses on loans for the three and nine months ended September 30, 2023 under the CECL methodology.


	Commercial Loans									Noncommercial Loans
(dollars in thousands)	Commercial			Real estate commercial		Other real estate construction		Other loans		Real estate 1-4 family construction		Real estate residential		Home equity			Consumer			Total Loans

Balance, June 30, 2023	$	1,028		$	1,880	$	356	$	7	$	23	$	666	$	581		$	172		$	4,713
Provision for (recovery of) credit losses		361			84		62		3		3		59		( 13	)		39			598
Charge-offs		( 201	)		—		—		—		—		—		—			( 13	)		( 214	)
Recoveries		3			—		—		—		—		1		—			14			18
Net (charge-offs) recoveries		( 198	)		—		—		—		—		1		—			1			( 196	)
Balance, September 30, 2023	$	1,191		$	1,964	$	418	$	10	$	26	$	726	$	568		$	212		$	5,115


	Commercial Loans										Noncommercial Loans
(dollars in thousands)	Commercial			Real estate commercial		Other real estate construction			Other loans		Real estate 1-4 family construction		Real estate residential		Home equity			Consumer			Total Loans

Balance, December 31, 2022	$	435		$	760	$	177		$	4	$	—	$	561	$	277		$	76		$	2,290
Cumulative effect of change in accounting principle		702			1,017		143			5		—		74		375			91			2,407
Provision for (recovery of) credit losses		585			187		140			1		26		89		( 92	)		54			990
Charge-offs		( 545	)		—		( 42	)		—		—		—		—			( 71	)		( 658	)
Recoveries		14			—		—			—		—		2		8			62			86
Net (charge-offs) recoveries		( 531	)		—		( 42	)		—		—		2		8			( 9	)		( 572	)
Balance, September 30, 2023	$	1,191		$	1,964	$	418		$	10	$	26	$	726	$	568		$	212		$	5,115

Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.


Allowance for loan losses and loan balances as of December 31, 2022	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	40	$	704	$	1,336	$	313,181	$	1,376	$	313,885
Non-Commercial		133		2,368		781		181,636		914		184,004
Total	$	173	$	3,072	$	2,117	$	494,817	$	2,290	$	497,889


Allowance for loan losses for the three months ended September 30, 2022	Commercial			Non-Commercial			Total
	(dollars in thousands)

Balance, beginning of period	$	2,560		$	1,634		$	4,194
Recovery of loan losses		( 1,208	)		( 304	)		( 1,512	)
Charge-offs		—			( 28	)		( 28	)
Recoveries		3			4			7
Net (charge-offs) recoveries		3			( 24	)		( 21	)
Balance at end of period	$	1,355		$	1,306		$	2,661


Allowance for loan losses for the nine months ended September 30, 2022	Commercial			Non-Commercial			Total
	(dollars in thousands)

Balance, beginning of period	$	2,429		$	1,597		$	4,026
Recovery of loan losses		( 1,142	)		( 265	)		( 1,407	)
Charge-offs		—			( 52	)		( 52	)
Recoveries		68			26			94
Net (charge-offs) recoveries		68			( 26	)		42
Balance at end of period	$	1,355		$	1,306		$	2,661


Allowance for loan losses and loan balances as of 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

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, 2023	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
	(dollars in thousands)

Commercial	$	59	$	—	$	59	$	97,805	$	97,864	$	—
SBA Paycheck Protection Program (PPP)		—		—		—		211		211		—
Real estate - commercial		46		532		578		211,486		212,064		—
Other real estate construction		—		—		—		44,091		44,091		—
Real estate 1-4 family construction		—		—		—		12,171		12,171		—
Real estate - residential		240		289		529		134,137		134,666		—
Home equity		350		—		350		59,604		59,954		—
Consumer loans		31		—		31		11,457		11,488		—
Other loans		—		—		—		6,326		6,326		—
Total	$	726	$	821	$	1,547	$	577,288	$	578,835	$	—


December 31, 2022	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
	(dollars in thousands)

Commercial	$	—	$	71	$	71	$	85,846	$	85,917	$	—
SBA Paycheck Protection Program (PPP)		252		—		252		279		531		—
Real estate - commercial		230		—		230		183,464		183,694		—
Other real estate construction		—		183		183		36,894		37,077		—
Real estate 1-4 family construction		—		—		—		6,613		6,613		—
Real estate - residential		507		117		624		108,819		109,443		—
Home equity		107		28		135		58,051		58,186		—
Consumer loan		29		—		29		9,733		9,762		—
Other loans		—		—		—		6,666		6,666		—
Total	$	1,125	$	399	$	1,524	$	496,365	$	497,889	$	—

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

The Company had $ 0 in foreclosed residential real estate and $ 0 of residential real estate in process of foreclosure at September 30, 2023 and December 31, 2022.

The composition of nonaccrual loans by class as of September 30, 2023 and December 31, 2022 was as follows:


	CECL						Nine Months Ended		Incurred Loss
	September 30, 2023						September 30, 2023		December 31, 2022
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Interest Income		Nonaccrual Loans
	(dollars in thousands)

Commercial	$	—	$	—	$	—	$	—	$	71
SBA Paycheck Protection Program (PPP)		—		—		—		—		—
Real estate - commercial		400		132		532		13		—
Other real estate construction		—		—		—		—		183
Real estate 1-4 family construction		—		—		—		—		—
Real estate - residential		187		102		289		13		117
Home equity		—		—		—		—		28
Consumer loans		—		—		—		—		—
Other loans		—		—		—		—		—
	$	587	$	234	$	821	$	26	$	399

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

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



September 30, 2023	Amortized Cost		Allowance for Credit Losses
	(dollars in thousands)
Commercial	$	—	$	—
SBA Paycheck Protection Program (PPP)		—		—
Real estate - commercial		523		19
Other real estate construction		—		—
Real estate 1-4 family construction		—		—
Real estate - residential		178		—
Home equity		—		—
Consumer loans		—		—
Other loans		—		—
Total	$	701	$	19

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

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

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

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

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

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

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

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023:


September 30, 2023	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
	(dollars in thousands)
Commercial (including PPP)
Pass	$	16,816	$	22,316	$	16,937	$	8,187	$	2,349	$	10,985	$	19,689	$	97,279
Watch		52		25		—		154		—		—		498		729
Special Mention		—		49		—		—		—		18		—		67
Substandard		—		—		—		—		—		—		—		—
Total commercial (including PPP)		16,868		22,390		16,937		8,341		2,349		11,003		20,187		98,075

Real estate - commercial
Pass		44,823		45,990		38,640		25,923		15,741		36,805		2,486		210,408
Watch		—		—		—		—		76		—		—		76
Special Mention		—		—		588		123		175		162		—		1,048
Substandard		—		—		400		132		—		—		—		532
Total real estate - commercial		44,823		45,990		39,628		26,178		15,992		36,967		2,486		212,064

Other real estate construction
Pass		18,834		12,530		4,146		4,934		579		2,223		797		44,043
Watch		—		—		—		—		—		48		—		48
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other real estate construction		18,834		12,530		4,146		4,934		579		2,271		797		44,091

Real estate 1-4 family construction
Pass		6,208		5,463		500		—		—		—		—		12,171
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total real estate 1-4 family construction		6,208		5,463		500		—		—		—		—		12,171

Real estate - residential
Pass		32,890		41,744		25,400		11,693		3,566		15,867		583		131,743
Watch		—		—		209		82		125		721		—		1,137
Special Mention		109		558		504		—		—		326		—		1,497
Substandard		—		—		—		204		—		85		—		289
Total real estate - residential		32,999		42,302		26,113		11,979		3,691		16,999		583		134,666

Home equity
Pass		76		134		156		237		94		1,655		57,452		59,804
Watch		—		—		—		—		19		131		—		150
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total home equity		76		134		156		237		113		1,786		57,452		59,954

Consumer loans
Pass		3,881		2,359		739		140		168		382		3,775		11,444
Watch		—		—		—		—		—		—		—		—
Special Mention		—		44		—		—		—		—		—		44
Substandard		—		—		—		—		—		—		—		—
Total consumer loans		3,881		2,403		739		140		168		382		3,775		11,488

Other loans
Pass		—		1,615		2,934		1,329		—		448		—		6,326
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other loans		—		1,615		2,934		1,329		—		448		—		6,326

Total loans	$	123,689	$	132,827	$	91,153	$	53,138	$	22,892	$	69,856	$	85,280	$	578,835

During nine months ended September 30, 2023 , twenty-five loans totaling $ 987,000 were converted from revolving to term loans.

The following table presents gross charge-offs by origination date as of September 30, 2023:


September 30, 2023	Gross Loan Charge-offs by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
	(dollars in thousands)
Commercial
Commercial	$	—	$	—	$	—	$	159	$	315	$	71	$	—	$	545
SBA Paycheck Protection Program (PPP)		—		—		—		—		—		—		—		—
Real estate - commercial		—		—		—		—		—		—		—		—
Other real estate construction		—		42		—		—		—		—		—		42
Other loans		—		—		—		—		—		—		—		—
Noncommercial
Real estate 1-4 family construction		—		—		—		—		—		—		—		—
Real estate - residential		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Consumer loans		—		23		4		3		—		4		37		71
Total charge-offs	$	—	$	65	$	4	$	162	$	315	$	75	$	37	$	658

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2022:


December 31, 2022	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	85,789	$	57	$	71	$	—	$	85,917
SBA Paycheck Protection Program (PPP)		531		—		—		—		531
Real estate - commercial		182,110		1,584		—		—		183,694
Other real estate construction		36,717		51		309		—		37,077
Real estate 1-4 family construction		6,613		—		—		—		6,613
Real estate - residential		106,968		2,359		116		—		109,443
Home equity		58,050		108		28		—		58,186
Consumer loans		9,715		47		—		—		9,762
Other loans		6,666		—		—		—		6,666
Total	$	493,159	$	4,206	$	524	$	—	$	497,889

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2023 and December 31, 2022 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, 2023 and December 31, 2022:


September 30, 2023	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	97,864	$	—	$	97,864
SBA Paycheck Protection Program (PPP)		211		—		211
Real estate - commercial		211,532		532		212,064
Other real estate construction		44,091		—		44,091
Real estate 1-4 family construction		12,171		—		12,171
Real estate - residential		134,377		289		134,666
Home equity		59,954		—		59,954
Consumer loans		11,488		—		11,488
Other loans		6,326		—		6,326
Total	$	578,014	$	821	$	578,835


December 31, 2022	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	85,846	$	71	$	85,917
SBA Paycheck Protection Program (PPP)		531		—		531
Real estate - commercial		183,694		—		183,694
Other real estate construction		36,894		183		37,077
Real estate 1-4 family construction		6,613		—		6,613
Real estate - residential		109,326		117		109,443
Home equity		58,158		28		58,186
Consumer loans		9,762		—		9,762
Other loans		6,666		—		6,666
Total	$	497,490	$	399	$	497,889

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and troubled debt restructurings. The Company individually assessed for impairment all nonaccrual loans and troubled debt restructurings. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. The table below summarizes the loans deemed impaired and the amount of specific reserves allocated by class at December 31, 2022.


December 31, 2022	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)

Commercial	$	18	$	—	$	18	$	22
SBA Paycheck Protection Program (PPP)		—		—		—		—
Real estate - commercial		503		—		503		18
Other real estate construction		183		183		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		2,318		572		1,746		131
Home equity		28		28		—		—
Consumer loans		22		—		22		2
Other loans		—		—		—		—
Total	$	3,072	$	783	$	2,289	$	173

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


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

Commercial	$	497	$	30
SBA Paycheck Protection Program (PPP)		—		—
Real estate - commercial		1,024		54
Other real estate construction		—		—
Real estate 1-4 family construction		—		—
Real estate - residential		2,192		118
Home equity		38		1
Consumer loans		—		—
Other loans		—		—
Total	$	3,751	$	203

Note 8 – Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” effective January 1, 2023. The amendments in ASU 2022-02 enhanced disclosures for loan modifications made for borrowers experiencing financial difficulty and eliminated the Troubled Debt Restructurings (“TDR”) accounting guidance for financial institutions that have adopted CECL.

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

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

The Company did no t modify any loans for borrowers experiencing financial difficulty during the nine-month period ended September 30, 2023 . Accordingly, the Company did no t have any loans made to borrowers experiencing financial difficulty that were modified during the first three quarters of 2023 that subsequently defaulted. A default on a modified loan is defined as being past due 90 days or being out of compliance with the modification agreement.

Prior to adoption of ASU 2016-13, modification of a loan constituted a troubled debt restructuring when a borrower was experiencing financial difficulty and the modification involved providing a concession to the existing loan contract. The Company offered various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal was rarely granted. Concessions offered were 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 included 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 have been requested. Loans modified as TDRs were typically already on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. The Company classified TDR loans as impaired loans and evaluated the need for an allowance for loan loss on a loan-by-loan basis. An allowance was 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 was deemed to be collateral dependent.

At December 31, 2022, the Company had $ 2.8 million in TDRs outstanding, of which two with balances totaling $ 52,000 were on a nonaccrual basis.

The following table presents as of September 30, 2022, the status of the types of loans modified as TDRs within the twelve months preceding such date.


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/Default
September 30, 2022	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
Below market interest rate		1	$	219		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		—		—		—		—		—		—
Forgiveness of principal/other		7		2,144		4		1,240		—		—		—		—
Total		8	$	2,363		4	$	1,240		—	$	—		—	$	—

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.

Our leases relate to four office locations, three of which are branch locations, with remaining terms of three to six 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, 2023 , operating lease ROU assets were $ 1.6 million and the operating lease liability was $ 1.7 million, compared to operating lease ROU assets of $ 2.0 million and an operating lease liability of $ 2.1 million at September 30, 2022 . Lease costs associated with all leases was $ 106,000 and $ 317,000 for the three and nine months ended September 30, 2023, respectively.

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


	Nine Months Ended September 30,
	2023			2022
	(in thousands except percent and period data)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	325		$	307
Right-of-use assets obtained in exchange for new operating lease liabilities		1,590			1,965
Weighted-average remaining lease term - operating leases, in years		4.2			5.1
Weighted-average discount rate - operating leases		2.57	%		2.53	%

The table below summarizes the maturity of remaining lease liabilities:


	September 30, 2023
	(in thousands)
2023 (remaining three months)	$	109
2024		446
2025		455
2026		416
2027		260
2028 and thereafter		117
Total lease payments		1,803
Less: Interest		( 99	)
Present value of lease liabilities		1,704

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, 2023 and December 31, 2022, outstanding financial instruments whose contract amounts represent credit risk were approximately:


	September 30, 2023		December 31, 2022
	(dollars in thousands)

Commitments to extend credit	$	193,001	$	165,992
Credit card commitments		22,711		20,376
Standby letters of credit		7,988		8,135
Total commitments	$	223,700	$	194,503

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancelable. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $ 150,000 and $ 141,000 at September 30, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within Other Liabilities.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the nine months ended September 30, 2023.


	Total Allowance for Credit Losses - Unfunded Commitments
	(dollars in thousands)

Balance, December 31, 2022	$	141
Cumulative effect of change in accounting principle		9
Provision for (recovery of) credit losses		—
Balance, September 30, 2023	$	150

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

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

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

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

The following tables provide fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:


	September 30, 2023
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	50,234	$	50,234	$	—	$	—
U.S. government agencies		45,743		—		45,743		—
GSE - Mortgage-backed securities and CMOs		119,960		—		115,956		4,004
Asset-backed securities		32,692		—		32,692		—
State and political subdivisions		74,026		—		74,026		—
Corporate bonds		5,444		—		5,444		—
Equity securities		299		299		—		—
Mortgage banking derivatives		711		—		283		428
Total assets at fair value on a recurring basis	$	329,109	$	50,533	$	274,144	$	4,432


	December 31, 2022
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	50,630	$	50,630	$	—	$	—
U.S. government agencies		33,762		—		33,762		—
GSE - Mortgage-backed securities and CMOs		115,995		—		111,996		3,999
Asset-backed securities		36,686		—		36,686		—
State and political subdivisions		82,266		—		82,266		—
Corporate bonds		5,344		—		5,344		—
Equity securities		292		292		—		—
Mortgage banking derivatives		—		—		—		—
Total assets at fair value on a recurring basis	$	324,975	$	50,922	$	270,054	$	3,999
Mortgage banking derivatives	$	175	$	—	$	80	$	95
Total liabilities at fair value on a recurring basis	$	175	$	—	$	80	$	95

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


	September 30, 2023
	Mortgage banking derivatives: Interest rate lock commitments			Securities available for sale: GSE mortgage-backed securities and CMOs		Total
	(dollars in thousands)
Balance at December 31, 2022	$	( 95	)	$	3,999	$	3,904
Change in fair value:
Included in income from mortgage banking		523			—		523
Included in accumulated other comprehensive income (loss)		—			5		5
Change in observability of significant inputs:
Included in income from mortgage banking		—			—		—
Included in accumulated other comprehensive income (loss)		—			—		—
Balance at September 30, 2023	$	428		$	4,004	$	4,432

During the fourth quarter of 2022, the Company had one mortgage-backed security that was transferred from Level 2 to Level 3 due to changes in the observability of significant inputs. At December 31, 2022, the Company was unable to observe a credit rating, pricing or recent trade history for the security or other such similar assets. At September 30, 2023, there were no significant observable inputs, and the fair value of the security remained classified as Level 3.

The fair value of mortgage IRLCs at September 30, 2023 was calculated based on a notional amount of $ 23.7 million. Significant unobservable inputs are used to determine the fair value of these derivatives. At September 30, 2023 , such inputs included anticipated margins to be earned based on market movement from the original lock date and an overall projected pull-through rate of 87.7 % determined by loan product, loan stage, and loan purpose. The fair value of mortgage IRLCs at December 31, 2022 was calculated based on a notional amount of $ 8.9 million. Significant unobservable inputs were the same as those used for the nine months ended

September 30, 2023 and assumed a projected pull-through rate of 92.98 % at December 31, 2022. Changes in interest rates and other assumptions could significantly change these estimated values.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2023 and December 31, 2022:


	September 30, 2023
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Individually evaluated loans	$	112	$	—	$	—	$	112
Total assets at fair value on a nonrecurring basis	$	112	$	—	$	—	$	112


	December 31, 2022
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	2,116	$	—	$	—	$	2,116
Total assets at fair value on a nonrecurring basis	$	2,116	$	—	$	—	$	2,116

Quantitative Information about Level 3 Fair Value Measurements

At September 30, 2023 , individually evaluated loans were being evaluated with discounted appraisals for individually assessed nonaccrual loans deemed collateral dependent.

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, 2023 and December 31, 2022 are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company.

The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2023 and December 31, 2022 :


September 30, 2023	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	77,870	$	77,870	$	77,870	$	—	$	—
Securities available for sale		328,099		328,099		50,234		273,861		4,004
Securities held to maturity		29,146		24,807		—		11,923		12,884
Equity securities		299		299		299		—		—
Loans held for investment, net		573,720		523,118		—		—		523,118
Loans held for sale		4,584		4,584		—		4,584		—
Restricted stock		1,672		1,672		1,672		—		—
Loan servicing assets		4,431		7,161		—		7,161		—
Mortgage banking derivatives		711		711		—		283		428
Accrued interest receivable		4,313		4,313		—		—		4,313

FINANCIAL LIABILITIES
Deposits	$	990,289		988,578		—		988,578		—
Short-term borrowings		931		931		—		931		—
Long-term borrowings		29,085		24,118		—		—		24,118
Accrued interest payable		328		328		—		—		328


December 31, 2022	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	114,581	$	114,581	$	114,581	$	—	$	—
Securities available for sale		324,683		324,683		50,630		270,054		3,999
Securities held to maturity		30,306		27,178		—		13,526		13,652
Equity securities		292		292		292		—		—
Loans held for investment, net		495,599		458,479		—		—		458,479
Loans held for sale		2,774		2,774		—		2,774		—
Restricted stock		1,428		1,428		1,428		—		—
Loan servicing assets		4,931		6,972		—		6,972		—
Accrued interest receivable		3,633		3,633		—		—		3,633

FINANCIAL LIABILITIES
Deposits	$	939,856	$	938,114	$	—	$	938,114	$	—
Short-term borrowings		1,044		1,044		—		1,044		—
Long-term borrowings		29,607		25,869		—		—		25,869
Mortgage banking derivatives		175		175		—		80		95
Accrued interest payable		108		108		—		—		108

At September 30, 2023 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 (Commitments and Contingencies) to the Notes to Consolidated Financial Statements.

Note 13 – Recent Accounting Pronouncements and Other Changes

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

The Inflation Reduction Act of 2022 (“IRA”) created a new nondeductible 1 % excise tax on repurchases of corporate stock by certain publicly traded corporations or their specified affiliates after December 31, 2022. The tax is imposed on the fair value of the stock of a covered corporation that is repurchased in a given year, less the fair market value of any stock issued in that year. A “covered corporation” is any domestic corporation whose stock is traded on an established securities market, such as an OTC market. The excise tax applies to all of the stock of a covered corporation regardless of whether the corporation has profits or losses. The IRA contains several exceptions to the excise tax, including, but not limited to, any repurchase of stock: in which the total value of the repurchased stock in a given year does not exceed $ 1,000,000 ; that is contributed to an employer-sponsored retirement plan or other similar stock compensation plan; or that is taxed as a dividend. The impact of the IRA on our consolidated financial statements will be dependent on the extent of stock repurchases made in future periods.

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

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

Note 14 – Mortgage Banking Derivatives

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, otherwise known as Interest Rate Lock Commitments (IRLCs). IRLCs on mortgage loans that will be held for resale are considered to be derivatives and must be accounted for at fair value on the balance sheet. Accordingly, such commitments are recorded at fair value in the mortgage banking derivatives asset 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, 2023 and December 31, 2022.


	Notional Amount		Fair Value
	(dollars in thousands)

Balance at September 30, 2023
Included in mortgage banking derivatives asset:
Interest rate lock commitments	$	23,662	$	428
Forward sales commitments		2,433		64
To-be-announced mortgage-backed securities trades		24,500		219
Included in mortgage banking derivatives liability:
Interest rate lock commitments		—		—
Forward sales commitments		—		—
To-be-announced mortgage-backed securities trades		—		—

Balance at December 31, 2022
Included in mortgage banking derivatives asset:
Interest rate lock commitments	$	—	$	—
Forward sales commitments		—		—
To-be-announced mortgage-backed securities trades		—		—
Included in mortgage banking derivatives liability:
Interest rate lock commitments		8,863		95
Forward sales commitments		—		—
To-be-announced mortgage-backed securities trades		10,000		80

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

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: increases in our past due loans and provision for credit losses that may result from local and/or broader economic effects, including the impacts of inflation and constraints on the availability of credit that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets, whether due to the recent high-profile bank failures 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, 2023 and December 31, 2022.

During the nine months ended September 30, 2023, the Company’s total assets increased $50.3 million, from $1.02 billion to $1.07 billion.

Cash and cash equivalents decreased $36.7 million during the nine months ended September 30, 2023, from $114.6 million to $77.9 million. The decrease in cash and cash equivalents was used to fund growth in the loan portfolio.

Investment securities consist of securities available for sale and securities held to maturity. For the nine-month period ended September 30, 2023, investment securities increased $2.3 million to $357.2 million at September 30, 2023. At September 30, 2023, the Company had unrealized losses on securities available for sale of $46.6 million, compared to unrealized losses of $41.3 million at December 31, 2022, a deterioration of $5.3 million. The decline in fair value of the available for sale securities is related to the increase in market interest rates at September 30, 2023 compared to December 31, 2022.

On January 1, 2023, the Company adopted ASC 326, requiring credit loss reserves on held to maturity securities. The adoption resulted in a $70,000 allowance for credit losses on securities held to maturity, which was allowed as a one-time adjustment to retained earnings at adoption. During the first nine months of 2023, a $5,000 recovery was realized due to two maturing bonds, leaving a $65,000 allowance for credit losses on securities held to maturity, with an amortized cost basis of $29.1 million, at September 30, 2023.

At September 30, 2023, equity securities improved in value from $292,000 at December 31, 2022 to $299,000 as a result of the increase in value in the equity market.

Loans held for sale increased $1.8 million from December 31, 2022 to $4.6 million at September 30, 2023. Loans held for investment increased from $497.9 million at December 31, 2022 to $578.8 million at September 30, 2023, an increase of $80.9 million. The Company experienced a net increase in all loan sectors with the exception of loans categorized as "Commercial - Other."

The allowance for loan losses was $2.3 million at December 31, 2022, which represented 0.46% of the total loans held for investment. As noted above, on January 1, 2023, the Company adopted ASC 326, requiring a change to the allowance methodology. The result of the accounting standard adoption was a $2.4 million increase in the allowance for credit losses on loans, which was allowed as a one-time adjustment to retained earnings at adoption. During the nine months ended September 30, 2023, the model called for a $990,000 increase to our current expected credit losses to account for loan growth and charge-offs during the same period. The allowance as a percentage of loans held for investment was 0.88% at September 30, 2023. Additional discussion regarding the allowance is included in the Asset Quality section below.

Other changes in the Company’s consolidated assets are primarily related to deferred tax assets, which increased $1.8 million from $10.7 million as of December 31, 2022 to $12.5 million at September 30, 2023 as a result of the decline in fair value of the available for sale security portfolio. Additionally, prepaid expenses, included in other assets, increased $522,000 from $830,000 as of December 31, 2022 to $1.4 million at September 30, 2023.

Customer deposits, our primary funding source, experienced a $50.4 million increase during the nine-month period ended September 30, 2023, increasing from $939.9 million to $990.3 million, a 5.4% increase. Growth in the number of deposit accounts and relationship sizes, combined with promotional time deposit offerings, contributed to the increase in total deposits. Demand noninterest-bearing checking accounts increased $14.6 million, primarily from growth in commercial accounts, and time deposits increased $87.4 million during the nine-month period ended September 30, 2023. Interest checking and money market accounts decreased $51.3 million and savings deposits decreased $348,000 during the nine months ended September 30, 2023. The decrease in interest checking, money market accounts and savings accounts is primarily related to the movement of funds into the Company’s higher yielding time deposits. While the Company did not require funding for the balance sheet and believes it has ample liquidity, the Company wants to ensure its depositors are paid a fair, market rate for their deposits.

Total short-term borrowings decreased $113,000 for the nine-month period ended September 30, 2023. At September 30, 2023, the Company had $29.1 million in long-term debt outstanding, which consists solely of its junior subordinated debt securities. During the third quarter of 2019, the Company issued $10.0 million in subordinated debt securities with a final maturity date of September 30, 2029 that may be redeemed on or after September 30, 2024. This junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. During the third quarter of 2021, the Company issued $12.0 million and $8.0 million of 10-year and 15-year fixed-to-floating rate subordinated debt securities, respectively. The 10-year subordinated notes mature on September 3, 2031, though they are redeemable at the Company’s option on or after September 3, 2026, and initially pay interest quarterly at an annual rate of 3.5%. From and including September 3, 2026 to but excluding September 3, 2031, or up to any early redemption date, the interest rate on the 10-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month secured overnight financing rate (“SOFR”), plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though they are redeemable at the Company’s option on or after September 3, 2031, and initially pay interest quarterly at an annual rate of 4.0%. From and including September 3, 2031 to but excluding September 3, 2036, or up to any early redemption date, the interest rate on the 15-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month SOFR plus 292 basis points payable quarterly in arrears. The subordinated debt has been structured to qualify as and is included in the calculation of the Company’s Tier 2 capital. The Company also has a $3.0 million line of credit of which $3.0 million was available to use at September 30, 2023.

Other changes in the Company’s liabilities are related to an increase of $1.0 million in other liabilities from December 31, 2022 to September 30, 2023 resulting primarily from accrual of reserves for payables due throughout 2023. Additionally, accrued interest payable increased during the same nine-month period as higher interest rates were paid on deposit accounts.

At September 30, 2023, total shareholders’ equity was $37.1 million, a decrease of $327,000 from December 31, 2022. This decrease is largely a result of unrealized losses on available for sale investment securities, net of tax, increasing by $4.1 million from December 31, 2022 to September 30, 2023. Net income for the nine-month period ended September 30, 2023 was $6.3 million, which positively contributed to our shareholders’ equity. ASC 326 was adopted on January 1, 2023, requiring an adoption entry to reduce retained earnings by the current expected credit losses adjustment, net of tax, of $1.9 million, which partially offset the impact of the Company’s net income for the first three quarters of 2023. During the nine months ended September 30, 2023, the Company repurchased 25,615 shares of common stock at a total cost of $196,000, and the Company paid $422,000 in dividends attributable to noncontrolling interest during the same period. See Note 3 (Noncontrolling Interest) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.

Results of Operations for the Three Months Ended September 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.1 million for the three months ended September 30, 2023, as compared to $2.8 million for the three months ended September 30, 2022, an decrease of $676,000. Net income available to common shareholders was $2.0 million, or $0.28 per common share, for the three months ended September 30, 2023, compared to $2.7 million, or $0.37 per common share, for the same period in 2022. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest. Earnings for the 2022 period included $1.5 million in recoveries of loan loss provision compared to provision expense of $599,000 during the 2023 period. The Company recorded a provision for credit losses on loans as a result of $44.6 million in loan growth during the three months ended September 30, 2023.

Net Interest Income

Net interest income for the three months ended September 30, 2023 was $8.2 million, a $965,000 increase from the $7.2 million reported for the comparative period in 2022. During the third quarter of 2023, the average yield on our interest-earning assets increased 137 basis points to 4.70% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 145 basis points to 1.95%. These changes resulted in a lower interest rate spread of 2.76% as of September 30, 2023, compared to 2.84% as of September 30, 2022. The Company’s net interest margin was 3.30% and 2.99% for the comparable periods

in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and four times during the first nine months of 2023 for a total of 525 basis points, repricing many of the Company’s variable rate assets and deposit funding sources.

The following table presents average balance sheet and a net interest income analysis for the three months ended September 30, 2023 and 2022, respectively:


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2023		2022		2023		2022		2023			2022
Interest-earning assets:
Taxable securities	$	299,584	$	279,567	$	2,764	$	1,577		3.66	%		2.24	%
Non-taxable securities (1)		58,470		69,250		317		391		2.69	%		2.76	%
Short-term investments		86,467		147,782		979		725		4.49	%		1.95	%
Equity securities		303		327		5		5		6.55	%		6.07	%
Taxable loans		538,215		463,589		7,570		5,298		5.58	%		4.53	%
Non-taxable loans (1)		13,325		12,957		75		69		2.80	%		2.60	%
Total interest-earning assets		996,364		973,472		11,710		8,065		4.70	%		3.34	%
Interest-bearing liabilities:
Interest-bearing deposits		689,896		651,089		3,188		513		1.83	%		0.31	%
Short-term borrowed funds		976		1,111		11		2		4.47	%		0.71	%
Long-term debt		29,076		29,542		334		338		4.56	%		4.54	%
Total interest bearing liabilities		719,948		681,742		3,533		853		1.95	%		0.50	%
Net interest spread	$	276,416	$	291,730	$	8,177	$	7,212		2.76	%		2.84	%
Net interest margin (1) (% of earning assets)										3.30	%		2.99	%

(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 for Credit Losses

The provision for credit losses on loans and securities held to maturity was $599,000 for the three months ended September 30, 2023, compared to a recovery of $1.5 million for the same period in 2022. There were net loan charge-offs of $196,000 for the three months ended September 30, 2023, as compared to net loan charge-offs of $21,000 during the same period of 2022. 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 increased by $281,000 for the three-month period ended September 30, 2023, as compared to the same period in 2022. Other service fees and commissions, primarily from increased advisory fees and commissions earned by the investment division, contributed $112,000 to the increase in total noninterest income. This increase was supplemented by an improvement of $138,000 in income from mortgage banking due to increased mortgage loan production in the third quarter of 2023 compared to the third quarter of 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 net of associated network costs for the reported periods is presented in the table below:


	Three Months Ended September 30,
	2023		2022
	(in thousands)
Income from debit card transactions	$	579	$	552
Income from credit card transactions		168		165
Gross interchange and transaction fee income		747		717
Network costs - debit card		279		246
Network costs - credit card		177		156
Total	$	291	$	315

Noninterest Expense

Noninterest expense for the three months ended September 30, 2023 remained relatively flat decreasing by $10,000 from the same period in 2022.

Total other noninterest expense decreased $9,000 for the three months ended September 30, 2023, compared to the same period in 2022. The table below reflects the composition of other noninterest expense for the referenced periods.


	Three Months Ended September 30,
	2023		2022
	(dollars in thousands)
Franchise and other taxes	$	19	$	41
Office supplies and printing		21		30
Employee education		27		43
Shareholder relations expense		44		31
Telephone and data lines		49		52
Postage		57		48
Director fees and expense		78		80
Dues and subscriptions		79		69
Other		217		206
Total	$	591	$	600

Income Tax Expense

The Company had income tax expense of $558,000 for the three months ended September 30, 2023 at an effective tax rate of 20.6% compared to income tax expense of $737,000 with an effective tax rate of 20.7% in the comparable 2022 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance.

Results of Operations for the Nine Months Ended September 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $6.3 million for the nine months ended September 30, 2023, as compared to $5.3 million for the nine months ended September 30, 2022, an increase of $1.0 million. Net income available to common shareholders was $5.9 million, or $0.82 per common share, for the nine months ended September 30, 2023, compared to $4.9 million, or $0.67 per common share, for the nine months ended September 30, 2022. 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, 2023 was $24.1 million, a $4.3 million increase from the $19.8 million reported for the comparative period in 2022. During the first nine months of 2023, the average yield on our interest-earning assets increased 140 basis points to 4.54% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 131 basis points to 1.70%. These changes resulted in a higher interest rate spread of 2.84% as of September 30, 2023, compared to 2.75% as of September 30, 2022. The Company’s net interest margin was 3.32% and 2.87% for the comparable periods in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and four times in the first nine months of 2023 for a total of 525 basis points, repricing many of the Company’s variable rate assets and deposit funding sources.

The following table presents average balance sheet and a net interest income analysis for the nine months ended September 30, 2023 and 2022, respectively:


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2023		2022		2023		2022		2023			2022
Interest-earning assets:
Taxable securities	$	297,875	$	287,174	$	7,879	$	3,820		3.54	%		1.78	%
Non-taxable securities (1)		60,656		67,093		1,010		1,119		2.79	%		2.75	%
Short-term investments		96,732		118,856		3,230		1,012		4.46	%		1.14	%
Equity securities		307		367		15		15		6.53	%		5.46	%
Taxable loans		516,158		455,466		20,791		15,588		5.39	%		4.58	%
Non-taxable loans (1)		12,684		10,623		210		183		2.77	%		2.84	%
Total interest-earning assets		984,412		939,579		33,135		21,737		4.54	%		3.14	%
Interest-bearing liabilities:
Interest-bearing deposits		680,713		622,542		8,016		903		1.57	%		0.19	%
Short-term borrowed funds		977		1,109		30		3		4.11	%		0.36	%
Long-term debt		29,257		29,547		1,000		1,011		4.57	%		4.57	%
Total interest-bearing liabilities		710,947		653,198		9,046		1,917		1.70	%		0.39	%
Net interest spread	$	273,465	$	286,381	$	24,089	$	19,820		2.84	%		2.75	%
Net interest margin (1) (% of earning assets)										3.32	%		2.87	%

(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 for Credit Losses

The provision for credit losses on loans and securities held to maturity was $985,000 for the nine months ended September 30, 2023, compared to a recovery of $1.4 million for the same period in 2022. There were net loan charge-offs of $572,000 for the nine months ended September 30, 2023, as compared to net loan recoveries of $42,000 during the same period of 2022. 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 increased by $68,000 for the nine-month period ended September 30, 2023, as compared to the same period in 2022. Income from mortgage banking, included in noninterest income, declined $716,000 during the aforementioned period. This decrease is due to the reduction in production, particularly mortgage refinancing activity, as interest rates rose sharply during 2022 and continued to rise into 2023. Positive market adjustments on supplemental executive retirement plans of $588,000, an increase in other service fees and commissions of $121,000 and an improvement in the fair market value of equity securities of $78,000 more than offset the impact of the reduction in mortgage banking income.


	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Income from debit card transactions	$	1,710	$	1,635
Income from credit card transactions		507		465
Gross interchange and transaction fee income		2,217		2,100
Network costs - debit card		823		777
Network costs - credit card		484		467
Total	$	910	$	856

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2023 increased by $534,000 from the same period in 2022, to $22.4 million. Positive market adjustments on supplemental executive retirement plans of $588,000 was the primary contributor to the increase in total noninterest expense.

Total other noninterest expense decreased $31,000 for the nine months ended September 30, 2023, compared to the same period in 2022. The table below reflects the composition of other noninterest expense for the referenced periods.


	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Office supplies and printing	$	67	$	73
Franchise and other taxes		91		117
Employee education		110		111
Shareholder relations expense		132		104
Telephone and data lines		147		157
Postage		169		165
Dues and subscriptions		220		219
Director fees and expense		246		257
Other		576		586
Total	$	1,758	$	1,789

Income Tax Expense

The Company had income tax expense of $1.6 million for the nine months ended September 30, 2023 at an effective tax rate of 20.3% compared to income tax expense of $1.2 million with an effective tax rate of 18.6% in the comparable 2022 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, 2023, the effective tax rate increased due to the increase in interest expense disallowance resulting from compliance with the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The larger disallowance is due to significantly greater projected interest expense for 2023 compared to 2022.

Asset Quality

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

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

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

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

At September 30, 2023, the level of our individually assessed loans, which includes all loans in nonaccrual status with total relationship exposure of more than $100,000 of collateral dependency, was $719,000.

The allowance, expressed as a percentage of gross loans held for investment, increased forty-two basis points from 0.46% at December 31, 2022 to 0.88% at September 30, 2023. The initial adoption of ASU 2016-13 on January 1, 2023 added forty-eight basis points to the December 31, 2022 reported allowance as a percentage of gross loans held for investment. Activity and forecast updates within the CECL model from January 1, 2023 to September 30, 2023 required a reduction of 6 basis points in allowance as a percentage of loans.

The ratio of nonaccrual loans to total loans increased from 0.08% at December 31, 2022 to 0.14% at September 30, 2023, and was related to the $422,000 increase in nonaccrual loans. Three loans were converted to nonaccrual during the first nine months of 2023, offset by one loan that was moved to other real estate owned, one loan that was removed from nonaccrual status and one loan that was charged off.

Other real estate owned increased to $141,000 at September 30, 2023 compared to $0 at December 31, 2022 as there was one loan foreclosed on during the first quarter of 2023.

As of September 30, 2023, management believed the level of the allowance for credit losses on loans was appropriate in light of the risk inherent in the loan portfolio.

The following table shows the comparison of nonperforming assets at September 30, 2023 and December 31, 2022:

Nonperforming Assets

(dollars in thousands)


	September 30, 2023			December 31, 2022
Nonperforming assets:
Accruing loans past due 90 days or more	$	—		$	—
Nonaccrual loans		821			399
Other real estate owned		141			—
Total nonperforming assets	$	962		$	399
Allowance for credit losses on loans	$	5,115		$	2,290
Nonaccrual loans to total loans		0.14	%		0.08	%
Allowance for credit losses on loans to total loans		0.88	%		0.46	%
Allowance for credit losses on loans to nonaccrual loans		623.02	%		573.93	%

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. Estimated uninsured deposits, including deposits collateralized by pledged assets, represented 38% of total deposits at September 30,

2023 and December 31, 2022. 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, 2023, these sources were the subsidiary bank’s established federal funds lines with correspondent banks aggregating $38.0 million, with available credit of $38.0 million; an established borrowing relationship with the Federal Home Loan Bank, with available credit of $145.9 million; and access to borrowings from the Federal Reserve Bank discount window, with available credit of $14.9 million. In March 2023, the Federal Reserve established a Bank Term Funding Program (“BTFP”) which offers loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The assets are valued at par. The Company had approximately $66.3 million of additional liquidity available through the BTFP at September 30, 2023. The Company also has a $3.0 million line of credit with TIB The Independent BankersBank, N.A. The line is held by the holding company and is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of September 30, 2023, $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 $29.1 million of junior subordinated debt at September 30, 2023 and $29.6 million at December 31, 2022.

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


	September 30, 2023			December 31, 2022
	(dollars in thousands)
Interest-earning cash and cash equivalents		68,407			109,224
Interest-earning cash and cash equivalents as a percent of:
Total loans held for investment		11.8	%		21.9	%
Total earning assets		6.8	%		11.3	%
Total deposits		6.9	%		11.6	%

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, 2023, the Company’s subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.7 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.7 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 30, 2023, the Company had $29.1 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.

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, 2023, 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 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 8, 2023.

Item 3. Quantitative and Qualitat ive 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 2023. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Ri sk Factors.

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

Item 2. Unregistered Sales of Equi ty Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2023.


	(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, 2023 Through July 31, 2023		—	$	—		—	$	—
August 1, 2023 Through August 31, 2023		3,678	$	7.42		—	$	—
September 1, 2023 Through September 30, 2023		4,659	$	7.71		—	$	—
Total		8,337	$	7.58		—	$	—

(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 Upo n Senior Securities.

None.

Item 4. Mine Safe ty Disclosures.

Not applicable.

Item 5. Ot her Information.

None.

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, 2023, in inline XBRL (eXtensible Business Reporting Language) (filed herewith)
104		Cover page interactive data file (formatted in inline XBRL and contained in Exhibit 101)

Signat ures

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 7, 2023	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date:	November 7, 2023	By:	/s/ Heather H. Almond
		Heather H. Almond
		Principal Financial Officer

TABLE OF CONTENTS

Part I Item 1. Financial Statements Item 1. Financ 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 Credit Losses on Loans Note 8 Modifications To Borrowers Experiencing Financial Difficulty 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 and Other Changes Note 14 Mortgage Banking Derivatives Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management S Discussion and Analysis Of Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 3. Quantitative and Qualitat Item 4. Controls and Procedures Item 4. Controls Part II. Other Information Part II. Other Item 1. Legal Proceedings Item 1. Legal Item 1A. Risk Factors Item 1A. Ri Item 2. Unregistered Sales Of Equity Securities, Use Of Proceeds, and Issuer Purchases Of Equity Securities Item 2. Unregistered Sales Of Equi Item 3. Defaults Upon Senior Securities Item 3. Defaults Upo Item 4. Mine Safety Disclosures Item 4. Mine Safe Item 5. Other Information Item 5. Ot 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, 2023

Valuation Technique

Unobservable Input

General
Range

Nonrecurring measurements:

Individually evaluated loans

Discounted appraisals

Collateral discounts and estimated costs to sell