UWHR 10-Q Quarterly Report June 30, 2024

UWHR 10-Q Quarter ended June 30, 2024

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 June 30, 2024


☐	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: 7,012,280 shares of common stock outstanding as of August 5, 2024.

Table of Contents


		Page No.

Part I.	FINANCIAL INFORMATION	2

Item 1 -	Financial Statements (Unaudited)	2

	Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	2

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023	3

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	6

	Notes to Consolidated Financial Statements	7

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4 -	Controls and Procedures	34

Part II.	OTHER INFORMATION	35

Item 1 -	Legal Proceedings	35

Item 1A -	Risk Factors	35

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3 -	Defaults Upon Senior Securities	35

Item 4 -	Mine Safety Disclosures	35

Item 5 -	Other Information	35

Item 6 -	Exhibits	36

	Signatures	37

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financia l Information

Item 1. Financ ial Statements.


	June 30, 2024 (Unaudited)			December 31, 2023*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	11,195		$	7,407
Interest-earning deposits with banks		46,276			56,027
Cash and cash equivalents		57,471			63,434
Securities available for sale, at fair value (amortized cost $ 384,893 and $ 369,301 respectively)		350,764			336,714
Securities held to maturity, at amortized cost (fair value $ 24,656 and $ 25,736 respectively)		27,252			28,600
Less allowance for credit losses on securities held to maturity		( 66	)		( 56	)
Net securities held to maturity		27,186			28,544
Equity securities, at fair value		324			302
Loans held for sale		3,611			4,695
Loans held for investment		636,738			592,071
Less allowance for credit losses on loans		( 5,908	)		( 5,561	)
Net loans held for investment		630,830			586,510
Premises and equipment, net		14,552			15,089
Interest receivable		4,688			4,393
Restricted stock		1,709			1,672
Bank owned life insurance		7,864			7,793
Deferred income tax benefit		9,056			8,910
Loan servicing assets		4,089			4,287
Mortgage banking derivatives		798			852
Other assets		10,318			9,396
Total assets	$	1,123,260		$	1,072,591

LIABILITIES
Deposits:
Demand noninterest-bearing	$	286,517		$	269,998
Interest checking and money market accounts		391,245			417,318
Savings deposits		95,208			101,193
Time deposits, $250,000 and over		128,162			78,046
Other time deposits		122,943			115,158
Total deposits		1,024,075			981,713
Short-term borrowed funds		6,400			1,379
Long-term debt		29,123			29,104
Mortgage banking derivatives		94			288
Other liabilities		11,436			10,666
Total liabilities		1,071,128			1,023,150

Off balance sheet items, commitments and contingencies (Note 9)

SHAREHOLDERS’ EQUITY
Common stock, $ 1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,068,577 and 7,124,438 at June 30, 2024 and December 31, 2023, respectively		8,836			8,905
Additional paid-in capital		12,510			12,876
Undivided profits		46,419			42,105
Accumulated other comprehensive loss		( 26,288	)		( 25,100	)
Total Uwharrie Capital Corp shareholders’ equity		41,477			38,786
Noncontrolling interest		10,655			10,655
Total shareholders’ equity		52,132			49,441
Total liabilities and shareholders’ equity	$	1,123,260		$	1,072,591

(*) Derived from audited consolidated financial statements

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	9,285		$	6,989		$	18,079		$	13,356
Investment securities:
Investment securities, taxable		3,011			2,623			5,932			5,115
Investment securities, non-taxable		310			323			622			693
Equity Securities		5			5			10			10
Interest-earning deposits with banks and federal funds sold		710			1,181			1,336			2,251
Total interest income		13,321			11,121			25,979			21,425
Interest Expense
Interest checking and money market accounts		1,591			1,485			3,190			2,907
Savings deposits		135			88			274			168
Time deposits, $250,000 and over		1,146			496			2,004			792
Other time deposits		1,225			643			2,358			961
Short-term borrowed funds		76			10			137			19
Long-term debt		332			332			662			666
Total interest expense		4,505			3,054			8,625			5,513
Net interest income		8,816			8,067			17,354			15,912
Provision for (recovery of) credit losses on:
Loans		410			101			405			391
Securities held to maturity		—			1			10			( 5	)
Unfunded loan commitments		21			7			( 14	)		—
Total provision for (recovery of) credit losses		431			109			401			386
Net interest income after provision for (recovery of) credit losses		8,385			7,958			16,953			15,526

Noninterest Income
Service charges on deposit accounts		267			264			535			513
Other service fees and commissions		897			822			1,828			1,711
Interchange and card transaction fees, net		322			315			610			619
Gain (loss) on sale/call of securities		—			9			( 148	)		( 42	)
Realized/unrealized gain (loss) on equity securities		( 19	)		( 23	)		22			11
Income from mortgage banking		606			891			1,440			1,585
Supplemental executive retirement plan gain (loss)		( 34	)		317			( 46	)		( 18	)
Other income		187			91			314			289
Total noninterest income		2,226			2,686			4,555			4,668
Noninterest Expense
Salaries and employee benefits		5,145			4,932			10,359			9,676
Net occupancy expense		429			432			854			885
Equipment expense		218			195			425			383
Data processing costs		203			204			433			408
Loan costs		51			98			84			198
Professional fees and services		262			179			526			437
Marketing and donations		339			342			705			724
Electronic banking expense		113			141			213			270
Software amortization and maintenance		329			296			659			603
FDIC insurance		126			117			249			234
Supplemental executive retirement plan gain (loss)		( 34	)		317			( 46	)		( 18	)
Other noninterest expense		651			589			1,253			1,167
Total noninterest expense		7,832			7,842			15,714			14,967
Income before income taxes		2,779			2,802			5,794			5,227
Income taxes		566			579			1,198			1,050
Net income	$	2,213		$	2,223		$	4,596		$	4,177
Consolidated net income	$	2,213		$	2,223		$	4,596		$	4,177
Less: net income attributable to noncontrolling interest		( 141	)		( 141	)		( 282	)		( 280	)
Net income attributable to Uwharrie Capital Corp and common shareholders		2,072			2,082			4,314			3,897
Net income per common share
Basic	$	0.29		$	0.29		$	0.61		$	0.54
Diluted	$	0.29		$	0.29		$	0.61		$	0.54
Weighted average common shares outstanding
Basic		7,093,666			7,215,163			7,108,070			7,215,891
Diluted		7,093,666			7,215,163			7,108,070			7,215,891

See accompanying notes

Uw harrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


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

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


	Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits		Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, March 31, 2023		7,075,125		$	8,844		$	12,633		$	36,930	$	( 27,219	)	$	10,655		$	41,843
Net Income		—			—			—			2,082		—			141			2,223
Repurchase of common stock		( 17,278	)		( 21	)		( 112	)		—		—			—			( 133	)
Other comprehensive loss		—			—			—			—		( 2,232	)		—			( 2,232	)
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—		—			( 103	)		( 103	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—		—			( 38	)		( 38	)
Balance, June 30, 2023		7,057,847		$	8,823		$	12,521		$	39,012	$	( 29,451	)	$	10,655		$	41,560

Balance, March 31, 2024		7,103,003		$	8,879		$	12,735		$	44,347	$	( 26,213	)	$	10,655		$	50,403
Net Income		—			—			—			2,072		—			141			2,213
Repurchase of common stock		( 34,426	)		( 43	)		( 225	)		—		—			—			( 268	)
Other comprehensive loss		—			—			—			—		( 75	)		—			( 75	)
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—		—			( 104	)		( 104	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—		—			( 37	)		( 37	)
Balance, June 30, 2024		7,068,577		$	8,836		$	12,510		$	46,419	$	( 26,288	)	$	10,655		$	52,132


	Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits			Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2022		7,075,125		$	8,844		$	12,633		$	37,030		$	( 31,765	)	$	10,655		$	37,397
Cumulative effect of change in accounting principle		—			—			—			( 1,915	)		—			—
Net Income		—			—			—			3,897			—			280			4,177
Repurchase of common stock		( 17,278	)		( 21	)		( 112	)		—			—			—			( 133	)
Other comprehensive income		—			—			—			—			2,314			—			2,314
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—			—			( 206	)		( 206	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—			—			( 74	)		( 74	)
Balance, June 30, 2023		7,057,847		$	8,823		$	12,521		$	39,012		$	( 29,451	)	$	10,655		$	41,560

Balance, December 31, 2023		7,124,438		$	8,905		$	12,876		$	42,105		$	( 25,100	)	$	10,655		$	49,441
Net Income		—			—			—			4,314			—			282			4,596
Repurchase of common stock		( 55,861	)		( 69	)		( 366	)		—			—			—			( 435	)
Other comprehensive loss		—			—			—			—			( 1,188	)		—			( 1,188	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—			—			( 208	)		( 208	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—			—			( 74	)		( 74	)
Balance, June 30, 2024		7,068,577		$	8,836		$	12,510		$	46,419		$	( 26,288	)	$	10,655		$	52,132

See accompanying notes

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


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

See accompanying notes

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated 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 2023 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2024. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Accounting Changes and Reclassifications

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

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

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

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

Note 2 – Comprehensive Income (Loss)

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

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


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

Note 3 – Noncontrolling Interest

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

Note 4 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had no stock options outstanding at June 30, 2024 or December 31, 2023 . The number of shares and earnings per share for the 2023 periods have been adjusted for the 2 % stock dividend declared on October 17, 2023 .

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding.

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

Note 5 – Investment and Equity Securities

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


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


June 30, 2024	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Allowance for Credit Losses		Net Carrying Amount
	(dollars in thousands)
Securities held to maturity:
State and political subdivisions	$	12,252	$	—	$	1,015	$	11,237	$	—	$	12,252
Corporate bonds		15,000		—		1,581		13,419		66		14,934
Total securities held to maturity	$	27,252	$	—	$	2,596	$	24,656	$	66	$	27,186


December 31, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale:
U.S. Treasury	$	54,984	$	—	$	3,479	$	51,505
U.S. government agencies		43,921		66		969		43,018
GSE - Mortgage-backed securities and CMOs		137,346		170		13,729		123,787
Asset-backed securities		31,469		244		200		31,513
State and political subdivisions		95,581		15		14,196		81,400
Corporate bonds		6,000		—		509		5,491
Total securities available for sale	$	369,301	$	495	$	33,082	$	336,714


December 31, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Allowance for Credit Losses		Net Carrying Amount
	(dollars in thousands)
Securities held to maturity:
U.S. government agencies	$	133	$	—	$	1	$	132	$	—	$	133
State and political subdivisions		13,467		—		985		12,482		—		13,467
Corporate bonds		15,000		—		1,878		13,122		56		14,944
Total securities held to maturity	$	28,600	$	—	$	2,864	$	25,736	$	56	$	28,544

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

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


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

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

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


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

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(dollars in thousands)
Gross proceeds from sales	$	—	$	4,536	$	—	$	11,329

Realized gains from sales	$	—	$	48	$	—	$	54
Realized losses from sales		—		39		—		96
Net realized gains (losses)	$	—	$	9	$	—	$	( 42	)

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

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

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


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


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

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

The following tables show contractual maturities of the investment portfolio as of June 30, 2024:


	June 30, 2024
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities available for sale:
Due within twelve months		27,750		27,531		3.76	%
Due after one but within five years		54,232		48,838		2.01	%
Due after five but within ten years		61,590		53,919		2.59	%
Due after ten years		241,321		220,476		3.89	%
	$	384,893	$	350,764		3.41	%


	June 30, 2024
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities held to maturity:
Due within twelve months		380		380		2.98	%
Due after five but within ten years		17,661		15,842		4.29	%
Due after ten years		9,211		8,434		3.41	%
	$	27,252	$	24,656		3.97	%

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024		2023
	(dollars in thousands)
Gross proceeds from sales	$	—		$	—		$	—	$	—

Net gains (losses) recognized during the period on equity securities	$	( 19	)	$	( 23	)	$	22	$	11
Less: Net gains (losses) recognized from equity securities sold during the period		—			—			—		—
Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date	$	( 19	)	$	( 23	)	$	22	$	11

Note 6 – Loans Held for Investment

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


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

Loans held for investment, net	$	630,830		$	586,510

Note 7 – Allowance for Credit Losses on Loans

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


	Commercial Loans										Noncommercial Loans
	Commercial			Real estate commercial		Other real estate construction		Other loans			Real estate 1-4 family construction		Real estate residential		Home equity			Consumer			Total
	(dollars in thousands)
Balance, March 31, 2024	$	1,480		$	2,033	$	323	$	11		$	34	$	855	$	600		$	187		$	5,523
Provision for (recovery of) credit losses		( 63	)		175		45		( 1	)		8		107		69			70			410
Charge-offs		( 17	)		—		—		—			—		—		( 1	)		( 73	)		( 91	)
Recoveries		54			—		—		—			—		—		1			11			66
Net (charge-offs) recoveries		37			—		—		—			—		—		—			( 62	)		( 25	)
Balance, June 30, 2024	$	1,454		$	2,208	$	368	$	10		$	42	$	962	$	669		$	195		$	5,908


	Commercial Loans									Noncommercial Loans
	Commercial			Real estate commercial		Other real estate construction		Other loans		Real estate 1-4 family construction		Real estate residential		Home equity		Consumer			Total
	(dollars in thousands)
Balance, March 31, 2023	$	1,010		$	1,860	$	325	$	7	$	—	$	657	$	567	$	170		$	4,596
Provision for (recovery of) credit losses		11			20		31		—		23		9		7		—			101
Charge-offs		( 1	)		—		—		—		—		—		—		( 22	)		( 23	)
Recoveries		8			—		—		—		—		—		7		24			39
Net (charge-offs) recoveries		7			—		—		—		—		—		7		2			16
Balance, June 30, 2023	$	1,028		$	1,880	$	356	$	7	$	23	$	666	$	581	$	172		$	4,713


	Commercial Loans										Noncommercial Loans
	Commercial			Real estate commercial		Other real estate construction			Other loans		Real estate 1-4 family construction		Real estate residential		Home equity			Consumer			Total
	(dollars in thousands)
Balance, December 31, 2023	$	1,493		$	2,057	$	389		$	9	$	31	$	796	$	582		$	204		$	5,561
Provision for (recovery of) credit losses		( 79	)		151		( 21	)		1		11		165		87			90			405
Charge-offs		( 17	)		—		—			—		—		—		( 1	)		( 118	)		( 136	)
Recoveries		57			—		—			—		—		1		1			19			78
Net (charge-offs) recoveries		40			—		—			—		—		1		—			( 99	)		( 58	)
Balance, June 30, 2024	$	1,454		$	2,208	$	368		$	10	$	42	$	962	$	669		$	195		$	5,908


	Commercial Loans											Noncommercial Loans
	Commercial			Real estate commercial		Other real estate construction			Other loans			Real estate 1-4 family construction		Real estate residential		Home equity			Consumer			Total
	(dollars in thousands)
Balance, December 31, 2022	$	435		$	760	$	177		$	4		$	—	$	561	$	277		$	76		$	2,290
Cumulative effect of change in accounting principle		702			1,017		143			5			—		74		375			91			2,407
Provision for (recovery of) credit losses		224			103		78			( 2	)		23		30		( 79	)		15			392
Charge-offs		( 344	)		—		( 42	)		—			—		—		—			( 58	)		( 444	)
Recoveries		11			—		—			—			—		1		8			48			68
Net (charge-offs) recoveries		( 333	)		—		( 42	)		—			—		1		8			( 10	)		( 376	)
Balance, June 30, 2023	$	1,028		$	1,880	$	356		$	7		$	23	$	666	$	581		$	172		$	4,713

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


June 30, 2024	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(dollars in thousands)
Commercial	$	41	$	147	$	188	$	102,425	$	102,613	$	—
Real estate - commercial		—		401		401		235,615		236,016		—
Other real estate construction		—		—		—		44,032		44,032		—
Real estate 1-4 family construction		—		—		—		18,987		18,987		—
Real estate - residential		779		818		1,597		151,910		153,507		—
Home equity		151		222		373		63,971		64,344		—
Consumer loans		73		—		73		11,195		11,268		—
Other loans		—		—		—		5,971		5,971		—
Total	$	1,044	$	1,588	$	2,632	$	634,106	$	636,738	$	—


December 31, 2023	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(dollars in thousands)
Commercial	$	46	$	154	$	200	$	102,162	$	102,362	$	—
Real estate - commercial		588		488		1,076		212,447		213,523		—
Other real estate construction		—		—		—		40,872		40,872		—
Real estate 1-4 family construction		—		—		—		12,481		12,481		—
Real estate - residential		715		278		993		143,445		144,438		—
Home equity		115		181		296		60,304		60,600		—
Consumer loan		84		—		84		11,497		11,581		—
Other loans		—		—		—		6,214		6,214		—
Total	$	1,548	$	1,101	$	2,649	$	589,422	$	592,071	$	—

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

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

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


							Six Months Ended
	June 30, 2024						June 30, 2024
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Interest Income
	(dollars in thousands)
Commercial	$	—	$	147	$	147	$	—
Real estate - commercial		401		—		401		—
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate - residential		176		642		818		17
Home equity		—		222		222		2
Consumer loans		—		—		—		—
Other loans		—		—		—		—
	$	577	$	1,011	$	1,588	$	19


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

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

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


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

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 June 30, 2024:


June 30, 2024	Term Loans by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
	(dollars in thousands)
Commercial
Pass	$	13,522	$	20,740	$	16,026	$	12,866	$	4,112	$	11,345	$	22,700	$	101,311
Watch		—		168		515		73		—		—		382		1,138
Special Mention		—		16		—		—		—		—		—		16
Substandard		—		—		—		—		148		—		—		148
Total commercial		13,522		20,924		16,541		12,939		4,260		11,345		23,082		102,613

Real estate - commercial
Pass		21,050		55,394		49,529		37,510		21,930		45,680		3,453		234,546
Watch		—		—		—		—		—		69		—		69
Special Mention		—		—		—		571		117		312		—		1,000
Substandard		—		—		—		401		—		—		—		401
Total real estate - commercial		21,050		55,394		49,529		38,482		22,047		46,061		3,453		236,016

Other real estate construction
Pass		13,185		15,890		5,352		2,704		3,311		2,443		1,102		43,987
Watch		—		—		—		—		—		45		—		45
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other real estate construction		13,185		15,890		5,352		2,704		3,311		2,488		1,102		44,032

Real estate 1-4 family construction
Pass		5,812		13,175		—		—		—		—		—		18,987
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total real estate 1-4 family construction		5,812		13,175		—		—		—		—		—		18,987

Real estate - residential
Pass		23,979		38,469		36,888		22,449		10,778		16,241		1,171		149,975
Watch		504		—		—		208		375		714		—		1,801
Special Mention		—		106		—		493		—		314		—		913
Substandard		—		555		—		—		191		72		—		818
Total real estate - residential		24,483		39,130		36,888		23,150		11,344		17,341		1,171		153,507

Home equity
Pass		23		134		287		44		405		1,236		61,629		63,758
Watch		—		—		—		109		—		84		150		343
Special Mention		—		—		—		—		—		21		—		21
Substandard		—		—		—		—		—		222		—		222
Total home equity		23		134		287		153		405		1,563		61,779		64,344

Consumer loans
Pass		4,946		2,940		1,440		310		85		394		1,128		11,243
Watch		—		—		—		—		—		—		—		—
Special Mention		—		25		—		—		—		—		—		25
Substandard		—		—		—		—		—		—		—		—
Total consumer loans		4,946		2,965		1,440		310		85		394		1,128		11,268

Other loans
Pass		—		—		1,602		2,725		1,254		390		—		5,971
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other loans		—		—		1,602		2,725		1,254		390		—		5,971

Total Pass		82,517		146,742		111,124		78,608		41,875		77,729		91,183		629,778
Total Watch		504		168		515		390		375		912		532		3,396
Total Special Mention		—		147		—		1,064		117		647		—		1,975
Total Substandard		—		555		—		401		339		294		—		1,589
Total loans	$	83,021	$	147,612	$	111,639	$	80,463	$	42,706	$	79,582	$	91,715	$	636,738

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

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


December 31, 2023	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
	(dollars in thousands)
Commercial
Pass	$	23,611	$	21,731	$	16,587	$	5,868	$	2,553	$	10,634	$	20,089	$	101,073
Watch		183		22		—		—		—		—		914		1,119
Special Mention		16		—		—		—		—		—		—		16
Substandard		—		—		—		154		—		—		—		154
Total commercial		23,810		21,753		16,587		6,022		2,553		10,634		21,003		102,362

Real estate - commercial
Pass		51,543		46,563		38,267		23,031		15,727		33,949		2,844		211,924
Watch		—		—		—		—		74		—		—		74
Special Mention		—		—		588		121		171		157		—		1,037
Substandard		—		—		400		88		—		—		—		488
Total real estate - commercial		51,543		46,563		39,255		23,240		15,972		34,106		2,844		213,523

Other real estate construction
Pass		20,458		10,368		3,050		3,711		542		2,148		548		40,825
Watch		—		—		—		—		—		47		—		47
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other real estate construction		20,458		10,368		3,050		3,711		542		2,195		548		40,872

Real estate 1-4 family construction
Pass		10,628		1,353		500		—		—		—		—		12,481
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total real estate 1-4 family construction		10,628		1,353		500		—		—		—		—		12,481

Real estate - residential
Pass		46,470		40,558		23,259		11,182		3,528		15,208		1,082		141,287
Watch		—		—		209		384		122		669		—		1,384
Special Mention		666		—		501		—		—		322		—		1,489
Substandard		—		—		—		196		—		82		—		278
Total real estate - residential		47,136		40,558		23,969		11,762		3,650		16,281		1,082		144,438

Home equity
Pass		173		134		95		407		94		1,309		57,800		60,012
Watch		—		—		109		—		19		130		149		407
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		181		—		181
Total home equity		173		134		204		407		113		1,620		57,949		60,600

Consumer loans
Pass		4,302		2,089		609		121		129		352		3,936		11,538
Watch		—		—		—		—		—		—		—		—
Special Mention		25		18		—		—		—		—		—		43
Substandard		—		—		—		—		—		—		—		—
Total consumer loans		4,327		2,107		609		121		129		352		3,936		11,581

Other loans
Pass		5		1,611		2,864		1,306		—		428		—		6,214
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total other loans		5		1,611		2,864		1,306		—		428		—		6,214

Total Pass		157,190		124,407		85,231		45,626		22,573		64,028		86,299		585,354
Total Watch		183		22		318		384		215		846		1,063		3,031
Total Special Mention		707		18		1,089		121		171		479		—		2,585
Total Substandard		—		—		400		438		—		263		—		1,101
Total loans	$	158,080	$	124,447	$	87,038	$	46,569	$	22,959	$	65,616	$	87,362	$	592,071

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


June 30, 2024	Gross Loan Charge-offs by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
	(dollars in thousands)
Commercial
Commercial	$	—	$	—	$	—	$	—	$	17	$	—	$	—	$	17
Real estate - commercial		—		—		—		—		—		—		—		—
Other real estate construction		—		—		—		—		—		—		—		—
Other loans		—		—		—		—		—		—		—		—
Noncommercial
Real estate 1-4 family construction		—		—		—		—		—		—		—		—
Real estate - residential		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Consumer loans		—		51		3		10		6		2		47		119
Total charge-offs	$	—	$	51	$	3	$	10	$	23	$	2	$	47	$	136


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

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2024 and December 31, 2023 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2024 and December 31, 2023:


June 30, 2024	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	102,466	$	147	$	102,613
Real estate - commercial		235,615		401		236,016
Other real estate construction		44,032		—		44,032
Real estate 1-4 family construction		18,987		—		18,987
Real estate - residential		152,689		818		153,507
Home equity		64,122		222		64,344
Consumer loans		11,268		—		11,268
Other loans		5,971		—		5,971
Total	$	635,150	$	1,588	$	636,738


December 31, 2023	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	102,208	$	154	$	102,362
Real estate - commercial		213,035		488		213,523
Other real estate construction		40,872		—		40,872
Real estate 1-4 family construction		12,481		—		12,481
Real estate - residential		144,160		278		144,438
Home equity		60,419		181		60,600
Consumer loans		11,581		—		11,581
Other loans		6,214		—		6,214
Total	$	590,970	$	1,101	$	592,071

Modifications to Borrowers Experiencing Financial Difficulty

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

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

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


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

The Company did no t have any loans made to borrowers experiencing financial difficulty that were modified during the twelve months ended December 31, 2023 that subsequently defaulted. A default on a modified loan is defined as being past due 90 days or being out of compliance with the modification agreement. The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that were modified during the twelve-month period ended December 31, 2023:


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

Note 8 - Leases

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

Our leases relate to four office locations, three of which are branch locations, with remaining terms of two to five years . Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of June 30, 2024 , operating lease ROU assets were $ 1.3 million and the operating lease liability was $ 1.4 million, compared to operating lease ROU assets of $ 1.7 million and an operating lease liability of $ 1.8 million at June 30, 2023. Lease costs associated with all leases was $ 106,000 and $ 212,000 f or the three and six months ended June 30, 2024, respectively.

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


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

The table below summarizes the maturity of remaining lease liabilities:


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

Note 9 - Commitments and Contingencies

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

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

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


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

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

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


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

Note 10 – Fair Value Disclosures

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

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

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

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

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

The Company does not record loans at fair value on a recurring basis. However, certain nonaccrual loans are individually evaluated in connection with determining the allowance for credit losses. If the loan is deemed to be collateral dependent and the relationship’s outstanding balance is $ 100,000 or greater, it will be individually evaluated. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans require an analysis of the collateral. The fair value of the collateral is based on appraised values discounted by liquidation costs which the Company considers Level 3 valuations.

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

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

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


	June 30, 2024
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
U.S. Treasury	$	49,429	$	49,429	$	—	$	—
U.S. government agencies		45,027		—		45,027		—
GSE - Mortgage-backed securities and CMOs		143,158		—		143,158		—
Asset-backed securities		27,946		—		27,946		—
State and political subdivisions		79,589		—		79,589		—
Corporate bonds		5,615		—		5,615		—
Equity securities		324		324		—		—
Mortgage banking derivatives		798		—		40		758
Total assets at fair value on a recurring basis	$	351,886	$	49,753	$	301,375	$	758
Mortgage banking derivatives	$	94	$	—	$	94	$	—
Total liabilities at fair value on a recurring basis	$	94	$	—	$	94	$	—


	December 31, 2023
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
U.S. Treasury	$	51,505	$	51,505	$	—	$	—
U.S. government agencies		43,018		—		43,018		—
GSE - Mortgage-backed securities and CMOs		123,787		—		123,787		—
Asset-backed securities		31,513		—		31,513		—
State and political subdivisions		81,400		—		81,400		—
Corporate bonds		5,491		—		5,491		—
Equity securities		302		302		—		—
Mortgage banking derivatives		852		—		46		806
Total assets at fair value on a recurring basis	$	337,868	$	51,807	$	285,255	$	806
Mortgage banking derivatives	$	288	$	—	$	288	$	—
Total liabilities at fair value on a recurring basis	$	288	$	—	$	288	$	—

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


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

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

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2024 and December 31, 2023:


	June 30, 2024
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Individually evaluated loans	$	671	$	—	$	—	$	671
Total assets at fair value on a nonrecurring basis	$	671	$	—	$	—	$	671


	December 31, 2023
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Individually evaluated loans	$	187	$	—	$	—	$	187
Total assets at fair value on a nonrecurring basis	$	187	$	—	$	—	$	187

Quantitative Information about Level 3 Fair Value Measurements

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

Note 11 – Fair Values of Financial Instruments

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

The fair value estimates presented at June 30, 2024 and December 31, 2023 are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company.

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


June 30, 2024	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	57,471	$	57,471	$	57,471	$	—	$	—
Securities available for sale		350,764		350,764		49,429		301,335		—
Securities held to maturity		27,186		24,656		—		11,237		13,419
Equity securities		324		324		324		—		—
Loans held for investment, net		630,830		589,574		—		—		589,574
Loans held for sale		3,611		3,611		—		3,611		—
Restricted stock		1,709		1,709		1,709		—		—
Loan servicing assets		4,089		7,272		—		7,272		—
Mortgage banking derivatives		798		798		—		40		758
Accrued interest receivable		4,688		4,688		—		—		4,688

FINANCIAL LIABILITIES
Deposits	$	1,024,075		1,022,794		—		1,022,794		—
Short-term borrowings		6,400		6,400		—		6,400		—
Long-term borrowings		29,123		25,470		—		—		25,470
Mortgage banking derivatives		94		94		—		94		—
Accrued interest payable		567		567		—		—		567


December 31, 2023	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	63,434	$	63,434	$	63,434	$	—	$	—
Securities available for sale		336,714		336,714		51,505		285,209		—
Securities held to maturity		28,544		25,736		—		12,614		13,122
Equity securities		302		302		302		—		—
Loans held for investment, net		586,510		544,985		—		—		544,985
Loans held for sale		4,695		4,695		—		4,695		—
Restricted stock		1,672		1,672		1,672		—		—
Loan servicing assets		4,287		7,030		—		7,030		—
Mortgage banking derivatives		852		852		—		46		806
Accrued interest receivable		4,393		4,393		—		—		4,393

FINANCIAL LIABILITIES
Deposits	$	981,713	$	980,534	$	—	$	980,534	$	—
Short-term borrowings		1,379		1,379		—		1,379		—
Long-term borrowings		29,104		25,102		—		—		25,102
Mortgage banking derivatives		288		288		—		288		—
Accrued interest payable		414		414		—		—		414

At June 30, 2024 the Company’s subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 9 (Commitments and Contingencies) to the Company's Notes to Consolidated Financial Statements.

Note 12 – Recent Accounting Pronouncements and Other Changes

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

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

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

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

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

Note 13 – Mortgage Banking Derivatives

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

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

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

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


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

Balance at December 31, 2023
Included in mortgage banking derivatives asset:
Interest rate lock commitments	$	21,791	$	806
Forward sales commitments		1,826		46
Included in mortgage banking derivatives liability:
To-be-announced mortgage-backed securities trades		23,000		288

Note 14 – Short-Term Borrowed Funds

During the first quarter of 2024, the Company borrowed $ 5.0 million through the FRB ’s Bank Term Funding Program ( “BTFP”). The BTFP was established as an additional source of liquidity against high-quality securities valued at par. The program offered loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The note matures on January 22, 2025 and charges interest at a rate of 4.93 %. The borrowing is secured by three available for sale agency securities issued by the Small Business Administration with par value totaling $ 7.5 million. At June 30, 2024, t he fair value of the pledged bonds was $ 6.7 million.

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

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: increases in our past due loans and provision for credit losses that may result from local and/or broader economic effects, including the impacts of inflation and constraints on the availability of credit that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

Comparison of Financial Condition at June 30, 2024 and December 31, 2023.

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

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

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

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

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

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

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

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

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

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

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

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

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

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.2 million for both three-month periods ended June 30, 2024 and 2023. Net income available to common shareholders was $2.1 million, or $0.29 per common share, for the three months ended June 30, 2024 and 2023. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

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

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


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

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

Noninterest Income

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

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


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

Noninterest Expense

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

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


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

Income Tax Expense

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

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

Net Income and Net Income Available to Common Shareholders

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

Net Interest Income

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

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


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

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

Noninterest Income

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


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

Noninterest Expense

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

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


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

Income Tax Expense

The Company had income tax expense of $1.2 million for the six months ended June 30, 2024 at an effective tax rate of 20.7% compared to income tax expense of $1.1 million with an effective tax rate of 20.1% in the comparable 2023 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance. For the six months ended June 30, 2024, the effective tax rate increased due to the increase in interest expense disallowance resulting from compliance with the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The larger disallowance is due to greater projected interest expense for 2024 compared to 2023.

Asset Quality

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

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

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

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

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

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

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

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

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

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

Nonperforming Assets

(dollars in thousands)


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

Liquidity and Capital Resources

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

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

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


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

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

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

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

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

Off-Balance Sheet Arrangements

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

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through June 30, 2024, with the exception of mortgage banking derivatives. See Note 13 (Mortgage Banking Derivatives) to the Company’s Notes to Consolidated Financial Statements for additional discussion of mortgage banking derivatives.

Contractual Obligations

The timing and amount of our contractual obligations has changed materially since our 2023 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2024. During the first quarter of 2024, the Company borrowed $5.0 million through the BTFP. The note matures on January 22, 2025 and charges interest at a rate of 4.93%.

Item 3. Quantitative and 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 second quarter of 2024. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

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 and Use of Proceeds.

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2024.


	(a) Total 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
April 1, 2024 Through April 30, 2024		—	$	—		—	$	—
May 1, 2024 Through May 31, 2024		15,696	$	7.83		—	$	—
June 1, 2024 Through June 30, 2024		18,730	$	7.77		—	$	—
Total		34,426	$	7.80		—	$	—

(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

3.1		Bylaws of Uwharrie Capital Corp, as amended (Incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the SEC on April 19, 2024)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024, in inline XBRL (eXtensible Business Reporting Language) (filed herewith)
104		Cover page interactive data file (formatted in inline XBRL and contained in Exhibit 101)

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:	August 6, 2024	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date:	August 6, 2024	By:	/s/ Heather H. Almond
		Heather H. Almond
		Principal Financial Officer

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 - Leases Note 9 - Commitments and Contingencies Note 10 Fair Value Disclosures Note 11 Fair Values Of Financial Instruments Note 12 Recent Accounting Pronouncements and Other Changes Note 13 Mortgage Banking Derivatives Note 14 Short-term Borrowed Funds 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 and Use Of Proceeds 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

3.1 Bylaws of Uwharrie Capital Corp, as amended (Incorporated by reference to Exhibit 3.1 of Registrants Current Report on Form 8-K filed with the SEC on April 19, 2024) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

June 30, 2024

Valuation Technique

Unobservable Input

General
Range

Nonrecurring measurements:

Individually evaluated loans

Discounted appraisals

Collateral discounts and estimated costs to sell