uwhr-ex13_221.htm

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was incorporated on February 24, 1993 to become the bank holding company for Uwharrie Bank (the “Bank”), formerly, known as Bank of Stanly, a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Uwharrie Investment Advisors, Inc., formerly known as Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

The Bank engages in retail and commercial banking with ten physical banking offices in North Carolina. The Bank provides a wide range of banking services including deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes, and electronic banking services.

On January 19, 2000, the Company completed its acquisition of Anson Bancorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provided financial services to customers through one banking office in Anson County until September 1, 2013 when it was consolidated with and into the Bank. The former Anson office is now operated by the Bank.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from the Bank to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into the Bank effective September 1, 2013. The former Cabarrus offices are now operated as branches of the Bank.

The Company and its subsidiaries are located in Stanly County, Anson County, Cabarrus County and Mecklenburg County. However, the Company intends to prudently expand its service area within the Charlotte Metropolitan and Uwharrie Lakes Regions of North Carolina.

Depository services offered by the Bank include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts, all tailored to meet customers’ needs. The Bank provides fixed and variable rate loans, which include mortgage, home equity, lines of credit, consumer and commercial loans. The Bank also offers internet banking, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard ® credit cards and a Visa ® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa ® and ATMs displaying the STAR ® or CIRRUS ® networks regionally and worldwide, respectively.

Uwharrie Investment Advisors, Inc., an SEC registered investment advisory firm, provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance ®) is a broker-dealer registered with the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for financial consultants registered with Private Client Services LLC, securities and insurance products are offered, including fixed annuities, long-term care products, Medicare supplement products, and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc.

Uwharrie Investment Group: Securities and insurance products are offered through Private Client Services, LLC, 2225 Lexington Rd, Louisville, KY 40206, ph: 502-451-0600, Member FINRA and SIPC. Private Client Services, LLC and Uwharrie Capital Corp along with its affiliates and/or subsidiaries are separate, distinct, and unaffiliated entities. It is important to note that securities and insurance products are: NOT BANK DEPOSITS – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT OBLICATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.

(Dollars in thousands, except per share amounts)	2019			2018			Percent Increase (Decrease)
For the year:
Net income	$	3,087		$	2,477			24.63	%
Net income (loss) available to common shareholders	$	2,523		$	1,907			32.30	%
Basic net income (loss) per common share (1)	$	0.35		$	0.26			38.46	%
Diluted net income (loss) per common share (1)	$	0.35		$	0.26			38.46	%
Weighted average common shares outstanding (diluted) (1)		7,199,262			7,229,333			(2.25	)%
At year-end:
Total assets	$	656,793		$	632,304			3.87	%
Total earning assets		607,161			583,631			4.03	%
Loans held for investment		357,950			369,970			(3.25	)%
Total interest-bearing liabilities		446,213			448,351			(0.48	)%
Shareholders’ equity		48,858			45,175			8.15	%
Book value per common share (1)	$	5.38		$	4.75			13.26	%
Averages for the year:
Total assets	$	645,681		$	612,403			5.43	%
Total earning assets		604,011			571,604			5.67	%
Loans held for investment		369,540			369,419			0.03	%
Total interest-bearing liabilities		440,758			428,025			2.97	%
Shareholders’ equity		47,993			44,468			7.93	%
Financial ratios (in percentage):
Return on average assets		0.48	%		0.40	%
Return on average shareholders’ equity		6.43	%		5.57	%
Average equity to average assets		7.43	%		7.26	%
Net interest margin (fully tax equivalent basis)		3.37	%		3.53	%
Allowance as % of loans at year-end		0.55	%		0.64	%
Allowance as % of nonperforming loans		67.82	%		227.38	%
Nonperforming loans to total loans		0.82	%		0.28	%
Nonperforming assets to total assets		0.52	%		0.33	%
Net loan charge-offs (recoveries) to average loans		(0.08	)%		0.05	%

It is the philosophy of Uwharrie Capital Corp to promote a strong base of local shareholders. While bid and ask prices for the Company’s common stock are quoted on the OTC Pink marketplace through www.otcmarkets.com, operated by OTC Markets Group, Inc. under the symbol UWHR, trading is sporadic with trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.

Shareholders needing information about purchasing or selling shares of Uwharrie Capital Corp should contact Tamara M. Singletary or Lisa E. Hartsell, Investor Relations at Uwharrie Capital Corp, 132 N. First Street, Post Office Box 338, Albemarle, NC 28002.

The Board of Directors adopts a dividend policy on an annual basis. For 2019, Uwharrie Capital Corp declared a 2% stock dividend on its outstanding common stock. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

	2019			2018
	(dollars in thousands)
ASSETS
Cash and due from banks	$	7,520		$	4,473
Interest-earning deposits with banks		147,678			113,461
Securities available for sale, at fair value		88,524			91,299
Securities held to maturity (fair value $13,499 and $10,750, respectively)		13,428			10,837
Loans held for sale		2,946			4,800
Loans:
Loans held for investment		357,950			369,970
Less allowance for loan losses		(1,981	)		(2,374	)
Net loans held for investment		355,969			367,596
Premises and equipment, net		17,062			14,800
Interest receivable		1,666			1,763
Restricted stock		1,144			1,094
Bank owned life insurance		8,796			8,671
Other real estate owned		494			1,047
Prepaid assets		714			558
Other assets		10,852			11,905
Total assets	$	656,793		$	632,304
LIABILITIES
Deposits:
Demand noninterest-bearing	$	150,283		$	129,714
Interest checking and money market accounts		263,136			324,391
Savings deposits		57,136			54,784
Time deposits, $250,000 and over		55,682			7,920
Other time deposits		59,641			50,092
Total deposits		585,878			566,901
Short-term borrowed funds		626			1,190
Long-term debt		9,992			9,974
Interest payable		55			16
Other liabilities		11,384			9,048
Total liabilities		607,935			587,129
Off balance sheet items, commitments and contingencies (Note 13)
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,095,920 and 7,126,541, respectively		8,870			8,908
Additional paid-in capital		12,784			12,885
Undivided profits		16,226			14,421
Accumulated other comprehensive income (loss)		323			(1,694	)
Total Uwharrie Capital shareholders’ equity		38,203			34,520
Noncontrolling interest		10,655			10,655
Total shareholders’ equity		48,858			45,175
Total liabilities and shareholders’ equity	$	656,793		$	632,304

The accompanying notes are an integral part of the consolidated financial statements.

	2019			2018			2017
	(dollars in thousands, except share
	and per share data)
Interest Income
Loans, including fees	$	18,977		$	18,205		$	16,569
Investment securities:
US Treasury		131			45			28
US Government agencies and corporations		1,490			1,405			1,507
State and political subdivisions non-taxable		408			434			439
State and political subdivisions taxable		59			47			47
Interest-earning deposits with banks and federal funds sold		2,702			1,737			750
Total interest income		23,767			21,873			19,340
Interest Expense
Interest checking and money market accounts		1,435			948			413
Savings deposits		102			91			49
Time deposits $250,000 and over		830			69			67
Other time deposits		620			204			185
Short-term borrowed funds		15			16			16
Long-term debt		563			554			547
Total interest expense		3,565			1,882			1,277
Net interest income		20,202			19,991			18,063
Provision for (recovery of) loan losses		(588	)		90			(236	)
Net interest income after provision for (recovery of) loan losses		20,790			19,901			18,299
Noninterest Income
Service charges on deposit accounts		1,348			1,220			1,169
Other service fees and commissions		2,687			2,621			2,674
Interchange and card transaction fees, net		826			648			656
Gain (loss) on sale of securities (includes reclassification of $35, $0 and $14 from accumulated comprehensive income in 2019, 2018 and 2017, respectively)		(35	)		—			(14	)
Income from mortgage loan sales		3,835			2,980			3,345
Other income		344			810			595
Total noninterest income		9,005			8,279			8,425
Noninterest Expense
Salaries and employee benefits		17,122			16,180			14,710
Net occupancy expense		1,693			1,616			1,261
Equipment expense		720			734			597
Data processing costs		706			923			1,000
Loan cost		359			306			356
Foreclosed real estate expense		300			45			293
Professional fees and services		929			1,058			723
Marketing and donations		758			786			977
Electronic banking expense		424			401			362
Software amortization and maintenance		925			924			787
FDIC insurance		132			234			229
Other noninterest expense		1,869			1,917			2,009
Total noninterest expense		25,937			25,124			23,304
Income before income taxes		3,858			3,056			3,420
Income taxes (includes reclassification of ($7), $0 and ($4) from accumulated other comprehensive income, respectively)		771			579			1,809
Net income	$	3,087		$	2,477		$	1,611
Consolidated net income	$	3,087		$	2,477		$	1,611
Less: Net income attributable to noncontrolling interest		(564	)		(570	)		(592	)
Net income attributable to Uwharrie Capital Corp and common shareholders		2,523			1,907			1,019
Net income per common share
Basic	$	0.35		$	0.26		$	0.14
Diluted	$	0.35		$	0.26		$	0.14
Weighted average common shares outstanding
Basic		7,199,262			7,229,333			7,427,036
Diluted		7,199,262			7,229,333			7,427,804

The accompanying notes are an integral part of the consolidated financial statements.

	Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2016		7,050,315		$	8,813		$	12,540		$	12,867		$	(1,318	)	$	10,623		$	43,525
Net Income		—			—			—			1,019			—			592			1,611
Tax Cuts and Jobs Act of 2017, reclassification from AOCI to retained earnings, tax effect		—			—			—			155			(155	)		—			—
Repurchase of common stock		(75,709	)		(95	)		(296	)		—			—			—			(391	)
2% stock dividend		138,247			173			580			(753	)		—			—			—
Cash paid – fractional shares		—			—			—			(6	)		—			—			(6	)
Other comprehensive income		—			—			—			—			366			—			366
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—			—			(416	)		(416	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—			—			(149	)		(149	)
Balance, December 31, 2017		7,112,853		$	8,891		$	12,824		$	13,282		$	(1,107	)	$	10,650		$	44,540
Net Income		—			—			—			1,907			—			570			2,477
Repurchase of common stock		(138,629	)		(173	)		(574	)		—			—			—			(747	)
2% stock dividend		138,939			174			586			(760	)		—			—			—
Cash paid – fractional shares		—			—			—			(8	)		—			—			(8	)
Stock options exercised		13,378			16			49			—			—			—			65
Other comprehensive income		—			—			—			—			(587	)		—			(587	)
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—			—			(417	)		(417	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—			—			(148	)		(148	)
Balance, December 31, 2018		7,126,541		$	8,908		$	12,885		$	14,421		$	(1,694	)	$	10,655		$	45,175
Net Income		—			—			—			2,523			—			564			3,087
Repurchase of common stock		(168,683	)		(211	)		(639	)		—			—			—			(850	)
2% stock dividend		138,062			173			538			(711	)		—			—			—
Cash paid – fractional shares		—			—			—			(7	)		—			—			(7	)
Other comprehensive income		—			—			—			—			2,017			—			2,017
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—			—			(416	)		(416	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—			—			(148	)		(148	)
Balance, December 31, 2019		7,095,920		$	8,870		$	12,784		$	16,226		$	323		$	10,655		$	48,858

The accompanying notes are an integral part of the consolidated financial statements.

	2019			2018			2017
	(dollars in thousands)
Cash flows from operating activities
Net income	$	3,087		$	2,477		$	1,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,074			1,067			857
Net amortization of security premiums/discounts AFS		555			767			850
Net amortization of security premiums/discounts HTM		139			146			147
Net amortization of loan servicing rights		831			663			733
Impairment of foreclosed real estate		237			(12	)		85
(Recovery) provision for loan losses		(588	)		90			(236	)
Deferred income taxes		15			(39	)		691
Net realized loss on sales / calls available for sale securities		35			—			14
Proceeds from sales of loans held for sale		126,011			96,718			97,360
Origination of loans held for sale		(124,973	)		(97,764	)		(96,684	)
(Gain) loss on sale of premises, equipment and other assets		(6	)		4			—
Increase in cash surrender value of life insurance		(125	)		(125	)		(124	)
(Gain) loss on sales of foreclosed real estate		40			(11	)		(35	)
(Increase) decrease in prepaid assets		(156	)		228			40
Net change in interest receivable		97			(54	)		(80	)
Net change in other assets		421			(422	)		(602	)
Net change in interest payable		39			(132	)		(3	)
Net change in other liabilities		(6	)		397			1,129
Net cash provided by operating activities		6,727			3,998			5,753
Cash flows from investing activities
Proceeds from sales, maturities, calls and paydowns of securities available for sale		27,270			7,853			16,185
Proceeds from sales, maturities, calls and paydowns of securities held to maturity		270			475			385
Purchase of securities available for sale		(22,466	)		(4,934	)		(6,338	)
Purchase of securities held to maturity		(3,000	)		—			—
Net (increase) decrease in loans		12,034			(13,433	)		(15,416	)
Purchases of life insurance investment		—			—			(1,525	)
Proceeds from sale of premises, equipment and other assets		189			4			—
Purchase of premises and equipment		(1,263	)		(829	)		(1,730	)
Proceeds from sales of foreclosed real estate		543			1,533			2,138
Net change in restricted stock		(50	)		(27	)		(15	)
Net cash provided by (used in) investing activities		13,527			(9,358	)		(6,316	)
Cash flows from financing activities
Net increase in deposit accounts		18,977			54,273			26,909
Net decrease in short-term borrowed funds		(564	)		(562	)		(410	)
Proceeds from long-term debt		9,992			440			—
Repayment of long-term debt		(9,974	)		—			(512	)
Repurchase of common stock, net		(850	)		(747	)		(391	)
Stock option exercise		—			65			—
Dividends on preferred stock		(564	)		(570	)		(592	)
Cash paid for fractional shares		(7	)		(8	)		(6	)
Net cash provided by financing activities		17,010			52,891			24,998
Increase in cash and cash equivalents		37,264			47,531			24,435
Cash and cash equivalents, beginning of year		117,934			70,403			45,968
Cash and cash equivalents, end of year	$	155,198		$	117,934		$	70,403
Supplemental disclosures of cash flow information
Interest paid	$	3,526		$	2,014		$	1,280
Income taxes paid		933			503			852
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		2,017			(587	)		366
Initial ROU asset for leased properties		2,256			—			—
Initial lease liability for leased properties		2,308			—			—
Loans transferred to foreclosed real estate		267			160			361
Company financed OREO		(70	)		—			(356	)
Mortgage servicing rights capitalized		684			313			586

The accompanying notes are an integral part of the consolidated financial statements.

Uwharrie Capital Corp (the “Company”) was incorporated under North Carolina law for the purpose of becoming the holding company for Bank of Stanly (“Stanly”). On July 1, 1993, Stanly became a wholly-owned subsidiary of the Company through a one-for-one exchange of the common stock of Stanly for common stock of the Company. On September 1, 2013, Bank of Stanly changed its name to Uwharrie Bank (“Uwharrie” or the “Bank”).

Uwharrie was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984 in Albemarle, North Carolina. Deposits with Uwharrie are insured by the Federal Deposit Insurance Corporation (“FDIC”). Uwharrie is under regulation of the Federal Reserve, the FDIC and the North Carolina Commissioner of Banks. In North Carolina, Uwharrie has ten branch locations that provide a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

In 1987, Uwharrie established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Uwharrie established a second wholly-owned subsidiary, BOS Financial Corporation, for the purpose of conducting business as a “broker dealer” in securities. During 1993, BOS Financial Corporation changed its name to The Strategic Alliance Corporation (“Strategic Alliance”) and was registered as a “broker dealer” and is regulated by the Financial Industry Regulatory Authority (“FINRA”).

The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1998 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission. During 2015, SIA changed its name to Uwharrie Investment Advisors, Inc. (“UIA”).

On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Company (“Anson”), operating out of its main office branch in Wadesboro. Anson was consolidated into Uwharrie Bank effective September 1, 2013.

On August 4, 2000, Uwharrie acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company. This company is currently inactive and does not affect the Company’s consolidated financial statements.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Uwharrie to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into Uwharrie Bank effective September 1, 2013.

On April 7, 2004 Uwharrie Mortgage, Inc. was established as a subsidiary of the Company to serve in the capacity of trustee and substitute trustee under deeds of trust.

The consolidated financial statements include the accounts of the Company, Uwharrie, UIA and Uwharrie’s subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.

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

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-earning deposits with banks.”

Investment securities available for sale consist of United States Treasuries, United States Government agencies, Government Sponsored Enterprise (GSE) mortgage backed securities and collateralized mortgage obligations (CMOs), corporate bonds and state and political subdivision bonds. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method and recorded on a trade basis. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities, to their fair value. Such write-downs would be included in earnings as realized losses to the extent the losses are associated with the credit quality of the issuer. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the period to maturity.

Investment securities held to maturity consist of United States Government agencies, corporate bonds and state and political subdivision bonds. The Company has both the intent and ability to hold the securities to maturity. These securities are reported at amortized cost.

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

The Company divides the loans it originates into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes: commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on a cash basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Generally, a minimum of six months of sustained performance is required.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. The provision for loan losses is expensed to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company has different specific risks identified within the loan segments. Specific risks within the commercial loan segment arise with borrowers that are experiencing diminished operating cash flows, depreciated collateral values or prolonged sales and rental absorption periods. Concentrations within the portfolio, if unmanaged, pose additional risk. Occasionally, the Company will purchase participation loans from other institutions. If these loans are not independently underwritten by the Bank, they could carry additional risk. Generally, owner-occupied commercial real estate loans carry less risk than non-owner occupied. Specific risks within the non-commercial portfolio tend to be tied to economic factors including high unemployment and decreased real estate values. Risk to the Company is greater as home values deteriorate more rapidly than amortization in a loan, leaving little to no equity in properties, especially in junior lien positions. Concentration in the portfolio, such as home equity lines of credit, could pose additional risk if not appropriately managed.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management. Loans are collectively evaluated based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Individually evaluated loans are based upon discounted cash flows or the underlying value of the collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Homogeneous loans are collectively evaluated by loan class for impairment. However, once a loan is deemed impaired, it will be evaluated individually for specific impairment.

Troubled debt restructure loans (TDRs) are modifications of a loan when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. TDRs are considered to be impaired loans and are individually evaluated for impairment.

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

The Company capitalizes mortgage and Small Business Administration (SBA) loan servicing rights when loans are sold and the loan servicing is retained. The amortization of servicing rights is realized over the estimated period that net servicing revenues are expected to be received. These projections are based on the amount and timing of estimated future cash flows. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are periodically evaluated for impairment based upon their fair value. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance and charged to other expense.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Real estate properties acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell upon foreclosure, establishing a new cost basis. Annually, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to noninterest expense, and costs related to the improvement of the property are capitalized if the fair value less cost to sell will allow it. If not, these costs are expensed also.

Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Additions and major replacements or betterments which extend the useful lives of premises and equipment are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Depreciation is computed principally by the straight-line method over estimated useful lives, except in the case of leasehold improvements, which are amortized over the term of the leases, if shorter. Useful lives range from five to seven years for furniture, fixtures and equipment, to ten to thirty-nine years for leasehold improvements and buildings, respectively. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are reflected in income. ROU assets that are recognized at the initial adoption of a lease arrangement are included in premises and equipment. More information regarding ROU assets can be found in Note 8 (Leases).

As a requirement for membership, the Bank invests in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank (“FRB”). These investments are carried at cost. Due to the redemption provisions of these investments, the Company estimated that fair value approximates cost and that this investment was not impaired.

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). Accounting Standards Codification (ASC) 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. As of December 31, 2019 and December 31, 2018, there are no outstanding awards.

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold. The tax returns for the Company are subject to audit for the 2016 fiscal year and thereafter. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of other expenses in the income statement; however, if interest becomes a material amount, it would be reclassified as interest expense. There were no interest or penalties accrued during the years ended December 31, 2019, 2018 and 2017.

Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in premises and equipment and other liabilities, respectively, on our consolidated balance sheet. We do not currently have any significant finance leases in which we are the lessee. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating

lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for the lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in the net occupancy expense in the consolidated statement of income

Under ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, for revenue not associated with financial instruments, guarantees and lease contracts, we apply the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when the performance obligation is satisfied. Our contracts with customers are generally short term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, we primarily use the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. We typically receive payment from customers and recognize revenue concurrent with the satisfaction of our performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time the performance obligations have been satisfied. In cases where we have not received payment despite satisfaction of our performance obligations, we accrue an estimate of the amount due in the period our performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. We generally act in a principal capacity, on our own behalf, in most of our contracts with customers. In such transactions, we recognize revenue and the related costs to provide our services on a gross basis in our financial statements. In some cases, we act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, we recognize revenue and the related costs to provide our services on a net basis in our financial statements. These transactions primarily relate to insurance and brokerage commissions and fees derived from our customers' use of various interchange and ATM/debit card/credit card networks.

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

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

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; 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 US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the “Level 1 input” column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the “Level 2 input” column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the “Level 3 input” column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

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

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

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

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the years ended December 31, 2019, 2018 and 2017:

The Company had no stock options outstanding at December 31, 2019 or December 31, 2018.

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS 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 earnings of the entity. On November 12, 2019, the Company’s Board of Directors declared a 2% stock dividend payable on December 9, 2019 to shareholders of record on November 25, 2019. All information presented in the accompanying consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

The computation of weighted average shares used in the calculation of basic and dilutive earnings per share is summarized below:

In January 2013 the Company’s subsidiary banks issued a total of $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualified as Tier 1 capital at each 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. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, 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.

ASU 2016-02, “Leases, Topic 842” was adopted January 1, 2019. This ASU increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between previous standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Both a ROU asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance. The impact of the new standard increased assets by $1.9 million and liabilities by $2.0 million, from the year ended December 31, 2018 to the year ended December 31, 2019. We currently have three properties that we operate with a lease term greater than one year.

ASU 2014-09. “Revenue from Contracts with Customers (Topic 606)” was adopted as of January 1, 2018. ASU 2014-09 requires us to report network costs associated with debit card and credit card transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the twelve months ended December 31, 2019, gross interchange and card transaction fees totaled $2.0 million while related network costs totaled $1.2 million. On a net basis, we reported $826,000 as interchange and card transaction fees in the accompanying Consolidated Statement of Income for the twelve months ended December 31, 2019. For the twelve months ended December 31, 2018 and December 31, 2017, interchange and card transaction fees were $1.7 million and $1.6 million, respectively, on a gross basis while related network costs were $1.1 million and $913,000, respectively. As a result of the adoption of this standard, balances in prior years were re-classified to reflect the net presentation. In 2018 and 2017, interchange and card transaction fees, net were $648,000 and $656,000, respectively.

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

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

Certain amounts in the 2018 and 2017 financial statements have been reclassified to conform to the 2019 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

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

At both December 31, 2019 and December 31, 2018, the Company owned Federal Reserve Bank stock reported at cost of $509,000. Also, at December 31, 2019 and December 31, 2018, the Company owned Federal Home Loan Bank (“FHLB”) stock of $635,000 and $585,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and 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 the fair value approximated cost and that these investments were not impaired at December 31, 2019.

Results from sales of securities available for sale for the years ended December 31, 2019, 2018 and 2017 are as follows:

At December 31, 2019 and 2018 securities available for sale with a carrying amount of $65.3 million and $71.5 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2019 and December 31, 2018. We believe these unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments. At December 31, 2019, the unrealized losses on available for sale securities less than twelve months related to three government agency bonds, six government sponsored enterprise (GSE) mortgage backed securities and one state and political subdivision bond. The Company had four government agency bonds and nine GSE mortgage backed securities that had been in a loss position twelve months or more at December 31, 2019. At December 31, 2018, the unrealized losses on held to maturity securities less than twelve months related to one corporate bond. At December 31, 2018, the unrealized loss on available for sale securities less than twelve months related to four government agency bonds, one GSE mortgage backed security and one corporate bond. The Company had sixteen government agency bonds, sixteen GSE mortgage backed securities, one corporate bond and eight state and political subdivision bonds that had been in a loss position for more than twelve months at December 31, 2018. The unrealized losses on held to maturity securities related to two corporate bonds and two state and political subdivision bonds.

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality, but that the losses are temporary in nature. At December 31, 2019, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following tables show contractual maturities of the investment portfolio as of December 31, 2019:

The mortgage-backed securities are shown separately as they are not due at a single maturity date.

The composition of net loans held for investment by class as of December 31, 2019 and 2018 is as follows:

Although the Bank’s loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily 1 to 4 family residential and construction mortgage loans and home equity loans, which represent 36.34% of total loans. Additionally, there is a concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings, equipment, and general commercial loans that represent 59.50% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $6.8 million and $4.5 million at December 31, 2019 and 2018, respectively. There were no loans 90 days past due and still accruing at December 31, 2019 or at December 31, 2018.

Restructured loans at December 31, 2019 and December 31, 2018 totaled $3.9 million and $3.5 million, respectively, and are included in the impaired loan total. The carrying value of foreclosed properties held as other real estate was $494,000 and $1.0 million at December 31, 2019 and 2018, respectively. The Company had $130,000 in foreclosed residential real estate and $387,000 of residential real estate in process of foreclosure at December 31, 2019.

The Company had loans of $166.9 million and $187.6 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2019 and 2018, respectively.

The Company’s loan policies are written to address loan-to-value ratios and collateralization methods with respect to each lending category. Consideration is given to the economic and credit risk of lending areas and customers associated with each category.

During the second quarter of 2019, the Company transitioned its in-house incurred loss allowance for loan loss model to an external

vendor incurred loss model that is CECL-ready. The overall financial impact related to switching models is considered immaterial. As

a result of the change in models, there has been a change in the methodology for establishing the allowance for loan losses, as

Default in the allowance for loan loss model is now considered 90 days past due, whereas default was defined as a

charge-off event in the previous model. This increases the probabilities of default for the Company, but reduces the loss given default

Probabilities of default are now more representative of the Company’s customers. Previously, an analysis was performed with a sample of North Carolina consumers to calculate the probabilities of default by credit score. In the new model, the Company is able to track probabilities of default based on historical information of loans in the portfolio. This is the largest impact of the model transition, resulting in an immaterial recovery of provision for loan losses.

The qualitative factors used in the model include adjustment to historical rates for the impact of the recession in the last business cycle, current volatility in the market, and management’s analysis of local economic factors and industry-specific outlooks.

Changes in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017 are presented below (the “other” category represents a one-time impact of re-classification for unfunded commitments’ allowance from the allowance for loan losses to an unfunded commitment liability):

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2019 and 2018:

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

December 31, 2019	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	190	$	—	$	190	$	58,885	$	59,075	$	—
Real estate - commercial		—		2,088		2,088		128,910		130,998		—
Other real estate construction		14		0		14		23,029		23,043		—
Real estate construction		—		—		—		7,600		7,600		—
Real estate - residential		326		752		1,078		70,044		71,122		—
Home equity		57		82		139		51,077		51,216		—
Consumer loan		27		—		27		12,930		12,957		—
Other loans		—		—		—		1,939		1,939		—
Total	$	614	$	2,922	$	3,536	$	354,414	$	357,950	$	—

December 31, 2018	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	54	$	—	$	54	$	57,122	$	57,176	$	—
Real estate - commercial		—		273		273		130,361		130,634		—
Other real estate construction		—		47		47		31,094		31,141		—
Real estate construction		—		—		—		7,805		7,805		—
Real estate - residential		890		606		1,496		74,908		76,404		—
Home equity		100		118		218		52,323		52,541		—
Consumer loan		86		—		86		12,073		12,159		—
Other loans		—		—		—		2,110		2,110		—
Total	$	1,130	$	1,044	$	2,174	$	367,796	$	369,970	$	—

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 accrual status 90 days or more until they are paid current or charged off.

The composition of nonaccrual loans by class as of December 31, 2019 and 2018 is as follows:

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. Nonperforming loans were $2.9 million at December 31, 2019 and $1.0 million at December 31, 2018.

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

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

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

Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, 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 tables below summarize risk grades of the loan portfolio by class as of December 31, 2019 and 2018:

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2019 and 2018:

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a valuation analysis is performed and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2019, 2018, and 2017:

	As of December 31, 2019								Year Ended December 31, 2019
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	4	$	—	$	4	$	—	$	6	$	—
Real estate - commercial		3,612		1,923		1,689		29		2,273		145
Other real estate construction		44		—		44		3		64		3
Real estate 1 -4 family construction		—		—		—		—		—		—
Real estate - residential		3,070		987		2,083		99		3,010		159
Home equity		82		13		69		10		116		5
Consumer loans		23		—		23		—		27		2
Total	$	6,835	$	2,923	$	3,912	$	141	$	5,496	$	314

									Year Ended
	As of December 31, 2018								December 31, 2018
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	7	$	—	$	7	$	—	$	32	$	—
Real estate - commercial		1,258		93		1,165		38		1,503		51
Other real estate construction		632		47		47		4		132		3
Real estate 1 -4 family construction		—		—		—		—		—		—
Real estate - residential		3,005		901		2,104		110		3,505		145
Home equity		83		51		32		1		54		3
Consumer loans		31		—		31		1		40		3
Total	$	5,016	$	1,092	$	3,386	$	154	$	5,266	$	205

									Year Ended
	As of December 31, 2017								December 31, 2017
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	44	$	10	$	34	$	10	$	25	$	2
Real estate - commercial		1,593		1,305		288		9		1,650		72
Other real estate construction		689		101		50		3		208		5
Real estate 1 -4 family construction		—		—		—		—		3		—
Real estate - residential		3,701		1,319		2,382		171		3,762		179
Home equity		35		22		13		1		66		1
Consumer loans		45		45		—		—		53		4
Total	$	6,107	$	2,802	$	2,767	$	194	$	5,767	$	263

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

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

For the twelve months ended December 31, 2019, 2018 and 2017, the following table presents a breakdown of the types of concessions made by loan class:

	Year Ended December 31, 2019
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		—	$	—	$	—
Other:
Commercial		1	$	50	$	4
Real estate - commercial		1		1,629		838
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		3		261		219
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		5	$	1,940	$	1,061
Total		5	$	1,940	$	1,061

	Year Ended December 31, 2018
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		—	$	—	$	—
Other:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		6		434		387
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		6	$	434	$	387
Total		6	$	434	$	387

	Year Ended December 31, 2017
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		—	$	—	$	—
Other:
Commercial		1	$	12	$	10
Real estate - commercial		2		178		173
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		6		708		675
Home equity		—		—		—
Consumer loans		1		9		5
Other loans		—		—		—
		10	$	907	$	863
Total		10	$	907	$	863

During the twelve months ended December 31, 2019, there was one TDR for which there was a payment default. There was one payment default in 2018 and one payment default on a TDR in 2017. The outstanding balance of TDRs at December 31, 2019 is $3.94 million with $3.91 million still accruing compared to an outstanding balance at December 31, 2018 of $3.5 million with $3.4 million still accruing.

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $117,000 in the allowance for loan loss as of December 31, 2019, as a direct result of these TDRs. At December 31, 2018 and 2017 there was $144,000 and $171,000 in the allowance for loan loss related to TDRs, respectively.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2019, 2018 and 2017:

The principal balance of loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $419.4 million and $418.6 million at December 31, 2019 and 2018, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of loan servicing rights follows:

The fair value of mortgage servicing rights was $3.1 million and $3.5 million at December 31, 2019 and 2018, respectively. The key assumptions used to value mortgage servicing rights were as follows:

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2019 and 2018 are listed below:

Depreciation expense was $1.1 million for the year ended December 31, 2019 compared to $1.1 million and $857,000 for the comparable periods of 2018 and 2017, respectively, and is included in net occupancy expense.

Our leases relate to three office locations, two of which are branch locations, with remaining terms of two to ten 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 December 31, 2019, operating lease ROU assets were $1.9 million and the lease liability was $2.0 million. The table below depicts information related to the Company’s leases:

Total rental expense related to the operating leases was $371,327, $339,782, and $155,757 for the years ended December 31, 2019, 2018 and 2017, respectively, and is included in net occupancy expense. A table detailing the lease expense associated with the aforementioned properties is below.

Lease Commitments Disclosure at December 31, 2018 Prior to Adoption of ASU 2016-02

Operating leases for 2018 and 2017 were accounted for under ASC 840, Leases. Total rental expense related to the operating leases was $339,782 and $155,575 for the years ended December 31, 2018 and 2017, respectively, and is included in net occupancy expense. A table detailing the lease expense associated with the aforementioned properties is below.

The maturities of fixed-rate time deposits at December 31, 2019 are reflected in the table below:

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2019 and 2018:

Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary bank, where an agreement is in place.

The subsidiary bank has combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $47.2 million at December 31, 2019.

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans and commercial real estate loans with eligible collateral value of $98.0 million with remaining availability of $56.0 million at December 31, 2019. There were no long-term advances under this line at December 31, 2019 or at December 31, 2018. The subsidiary bank also has standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The aggregate amount of the letters of credit was $42.0 million at December 31, 2019.

During the third quarter of 2019, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $10.0 million, of which the entire $10.0 million was outstanding at December 31, 2019. These securities have a final maturity date of September 30, 2029 and may be redeemed by the Company after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company will have a twenty percent reduction beginning at September 30, 2024.

As of December 31, 2019, the scheduled maturities of these long-term borrowings are as follows:

The significant components of income tax expense for the years ended December 31, 2019, 2018 and 2017 are summarized as follows:

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 21% to income before income taxes is summarized below:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2019, 2018 and 2017 are as follows:

The net deferred tax asset is included in other assets on the accompanying consolidated balance sheets.

The Tax Cut and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The SEC issued Staff Accounting Bulletin No. 118 to address uncertainty in applying ASC Topic 740 in the reporting period in which the Tax Act was enacted. The Tax Act included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. Tax expense was increased in the fourth quarter of 2017 by a provisional $806,000 to reflect the Tax Act changes. This increase includes $155,000 tax expense related to the revaluation of the deferred tax asset for items charged to AOCI. The revaluation of deferred tax assets related to items charged to AOCI was a component of 2017 income tax expense and recognized in continuing operations as required by ASC Topic 740.

The subsidiary bank is party to financial instruments with off-balance sheet risks 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 subsidiary bank’s risk of loss with the 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.

As of December 31, 2019 and 2018, outstanding financial instruments whose contract amounts represent credit risk were as follows:

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

The subsidiary bank makes commercial, agricultural, real estate mortgage, home equity and consumer loans primarily in Stanly, Anson, Cabarrus and Mecklenburg counties. A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in these counties.

Although the Company’s composition of loans is diversified, there is some concentration of mortgage real estate loans, primarily 1-to-4 family residential mortgage loans and in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment in the total portfolio. The Bank’s policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. The Bank’s lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.

The Company has granted loans to certain directors and executive officers and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their related interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:

At December 31, 2019, the Company had approved, but unused lines of credit, totaling $1.3 million to executive officers and directors, and their related interests, compared to $3.9 million at December 31, 2018. In addition, at December 31, 2019, the Company had $12.7 million of deposits for executive officers and directors, and their related interest compared to $10.6 million at December 31, 2018. In addition to deposits and loans, certain directors have been issued the subordinated debt of the Company. The amount of related interest in the Company’s subordinated debt in 2019 is $1.1 million compared to $795,000 at December 31, 2018.

During 2017, the Company’s broker-dealer subsidiary (The Strategic Alliance Corp) brokered a private placement offering in the amount of $4.1 million, producing revenue in 2017 of $202,250. Certain officers and directors of the Bank were involved with the transaction as investors in the private placement.

The Company and its banking subsidiary are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels of capital, restrict the amount of dividends that may be distributed, and require that reserves on deposit liabilities be maintained in the form of vault cash or deposits with the Federal Reserve Bank.

For the reserve maintenance period in effect at December 31, 2019, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $4.9 million as reserves on deposit liabilities.

The Company and its subsidiary bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets.

In 2013, bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The rules include 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%, require a minimum ratio of total capital to risk-weighted assets of 8.00%, and require a minimum Tier 1 leverage ratio of 4.00%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the rules. The rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements phased in over a multi-year schedule, becoming fully phased-in on January 1, 2019. As of December 31, 2019, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under the capital adequacy rules.

Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.

											Minimum to Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2019
Total Capital to Risk
Weighted Assets:
Consolidated	$	60,509		14.1	%	$	34,387		8.0	%	$	42,984		10.0	%
Uwharrie Bank		58,082		13.6	%		34,098		8.0	%		42,622		10.0	%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated		48,536		11.3	%		25,790		6.0	%		34,387		8.0	%
Uwharrie Bank		56,101		13.2	%		25,573		6.0	%		34,098		8.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
Consolidated		37,881		8.8	%		19,343		4.5	%		27,940		6.5	%
Uwharrie Bank		45,446		10.7	%		19,180		4.5	%		27,704		6.5	%
Tier 1 Capital to
Average Assets:
Consolidated		48,536		7.4	%		26,336		4.0	%		32,920		5.0	%
Uwharrie Bank		56,101		8.5	%		26,249		4.0	%		32,812		5.0	%

											Minimum to Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2018
Total Capital to Risk
Weighted Assets:
Consolidated	$	58,777		14.0	%	$	33,660		8.0	%	$	42,076		10.0	%
Uwharrie Bank		57,765		13.8	%		33,460		8.0	%		41,826		10.0	%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated		46,869		11.1	%		25,245		6.0	%		33,660		8.0	%
Uwharrie Bank		55,391		13.2	%		25,095		6.0	%		33,460		8.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
Consolidated		36,214		8.6	%		18,934		4.5	%		27,349		6.5	%
Uwharrie Bank		44,736		10.7	%		18,821		4.5	%		27,187		6.5	%
Tier 1 Capital to
Average Assets:
Consolidated		46,869		7.4	%		25,347		4.0	%		31,683		5.0	%
Uwharrie Bank		55,391		8.8	%		25,254		4.0	%		31,567		5.0	%

As of December 31, 2019, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company’s subsidiary bank as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorization.

In January 2013, the Company’s subsidiary bank issued $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at the subsidiary bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000.

During 2013, the Company’s subsidiary bank raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, 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. The offering raised $2.8 million in new capital less total issuance costs of $23,000.

The total net amount of capital raised from Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C issued at the subsidiary bank level is presented as noncontrolling interest in the consolidated balance sheets.

All of the Company’s aforementioned investment in its subsidiary bank qualifies for Tier 1 capital treatment for the bank and is included as such in its year end capital ratios.

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. During 2019, the Company repurchased 168,683 shares of outstanding common stock and repurchased 138,629 and 75,709 shares of outstanding common stock during 2018 and 2017, respectively.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2019, both the SOP II plan and the SPP II plan had expired with no options outstanding.

As of December 31, 2019, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.

There were 13,378 options exercised in 2018 at a weighted average exercise price of $4.93. There were no options exercised in 2019 or 2017.

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day of the calendar month coincident or next following the date the associate attains the age of 18 and completes thirty days of eligibility service. Employees are 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $446,228 in 2019, $428,162 in 2018 and $361,936 in 2017, determined as follows:

The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. Certain of the plan benefits will accrue and vest during the period of employment and will be paid in fixed monthly benefit payments for up to ten years upon separation from service. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.

The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service. The plans assets are maintained in a rabbi trust and are recorded at fair value with the corresponding liability adjusted to the same fair value.

During each year of 2019, 2018 and 2017, $336,800 was expensed for benefits provided under the plans. The liability accrued for deferred compensation under the plan amounted to $4.7 million and $4.4 million at December 31, 2019 and 2018, respectively.

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2019, 2018, and 2017, the expense associated with these policies was $13,107, $1,846, and $10,533 respectively.

The liability associated with the split-dollar life insurance policies is $786,000 and $773,000 at December 31, 2019 and 2018, respectively.

During 2015, the Company adopted the 2015 Stock Grant Plan (“SGP”), under which the Company, at its discretion, may choose to make grants or awards of Uwharrie Capital Corp common stock (the “Common Stock”) to employees, directors or independent contractors of the Company or its subsidiaries as an alternate form of compensation or as a performance bonus. Shares of Common Stock to be used for Stock Grants under this Plan will be outstanding shares purchased by a revocable trust formed by the Company (the “Trust”). Participants will be 100% vested in the shares purchased on their behalf as soon as the Trust’s purchase is completed. The Company recognizes expense for the value of the shares at the time they are purchased by the Trust. During 2019 there were 14,400 shares granted at an expense of $72,000 compared to 8,926 shares granted at an expense of $50,000 in 2018 and 8,734 shares granted at an expense of $50,000 in 2017.

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 December 31, 2019 and December 31, 2018, 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 a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2019 and December 31, 2018:

	Carrying		Estimated
December 31, 2019	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	155,198	$	117,938	$	115,693	$	2,245	$	—
Securities available for sale		88,524		88,524		5,012		83,512		—
Securities held to maturity		13,428		13,499		—		10,499		3,000
Loans held for investment, net		355,969		354,269		—		—		354,269
Loans held for sale		2,946		2,946		—		2,946		—
Restricted stock		1,144		1,144		1,144		—		—
Loan servicing rights		1,723		3,228		—		3,228		—
Accrued interest receivable		1,666		1,666		—		—		1,666
FINANCIAL LIABILITIES
Deposits	$	585,878		567,130	$	—	$	567,130	$	—
Short-term borrowings		626		626		—		626		—
Long-term debt		9,992		10,180		—		—		10,180
Accrued interest payable		55		55		—		—		55

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

	Carrying		Estimated
December 31, 2018	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	117,934	$	117,901	$	115,693	$	2,208	$	—
Securities available for sale		91,299		91,299		4,955		86,344		—
Securities held to maturity		10,837		10,750		—		10,750		—
Loans held for investment, net		367,596		364,636		—		—		364,636
Loans held for sale		4,800		4,800		—		4,800		—
Restricted stock		1,094		1,094		1,094		—		—
Mortgage servicing rights		1,850		3,455		—		3,455		—
Accrued interest receivable		1,763		1,763		—		—		1,763
FINANCIAL LIABILITIES
Deposits	$	566,901	$	521,508	$	—	$	521,508	$	—
Short-term borrowings		1,190		1,190		—		1,190		—
Long-term debt		9,974		10,086		—		—		10,086
Accrued interest payable		16		16		—		—		16

At December 31, 2019, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed. The fair value is not material. See Note 13.

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:

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 that were recognized at fair value below cost at the end of the period. Assets re-measured at fair value during the period are included in the table below as of December 31, 2019 and December 31, 2018:

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

At December 31, 2019 and 2018, impaired loans were being evaluated with discounted expected cash flows for performing TDRs and discounted appraisals were being used on collateral dependent loans.

The following is a summary of the condensed financial statements of Uwharrie Capital Corp:

	2019			2018			2017
	(dollars in thousands)
Cash flows from operating activities
Net income	$	3,087		$	2,477		$	1,611
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries		(1,206	)		(2,026	)		(745	)
Increase in other assets		(435	)		(198	)		(124	)
Increase in other liabilities		528			220			267
Net cash provided by operating activities		1,974			473			1,009
Cash flows from financing activities
Decrease in master notes		(564	)		(562	)		(410	)
Decrease in short-term debt		—			—			(500	)
Increase (decrease) in long-term debt		(440	)		440			—
Net increase in subordinated debentures		458			—			—
Net increase in investment in subsidiaries		—			(250	)		—
Net proceeds from issuance of common stock - stock options		—			65			—
Repurchase of common stock, net		(850	)		(747	)		(391	)
Cash paid for fractional shares		(7	)		(7	)		(7	)
Other, net		1			—			—
Net cash used by financing activities		(1,402	)		(1,061	)		(1,308	)
Net decrease in cash and cash equivalents		572			(588	)		(299	)
Cash and cash equivalents at beginning of year		1,543			2,131			2,430
Cash and cash equivalents at end of year	$	2,115		$	1,543		$	2,131

(dollars in thousands except ratios, per share and shares outstanding information)

	2019			2018			2017			2016			2015
Summary of Operations
Interest income	$	23,767		$	21,873		$	19,340		$	18,046		$	17,847
Interest expense		3,565			1,882			1,277			1,310			1,733
Net interest income		20,202			19,991			18,063			16,736			16,114
Provision for (recovery of) loan losses		(588	)		90			(236	)		(88	)		(620	)
Noninterest income		9,005			8,279			8,425			9,357			7,712
Noninterest expense		25,937			25,124			23,304			23,075			21,633
Income taxes		771			579			1,809			895			806
Net income	$	3,087		$	2,477		$	1,611		$	2,211		$	2,007
Less: Net income attributable to noncontrolling interest		(564	)		(570	)		(592	)		(593	)		(592	)
Less: Dividends on preferred stock	$	—		$	—		$	—		$	—		$	—
Net Income (loss) available to common shareholders	$	2,523		$	1,907		$	1,019		$	1,618		$	1,415
Per Common Share
Net income – basic (1)	$	0.35		$	0.26		$	0.14		$	0.21		$	0.19
Net income (loss) – diluted (1)		0.35			0.26			0.14			0.21			0.19
Book value (1)		5.38			4.75			4.58			4.40			4.33
Weighted Average Shares
Outstanding:
Basic (1)		7,199,262			7,229,333			7,427,036			7,531,360			7,634,024
Diluted (1)		7,199,262			7,229,333			7,427,804			7,531,470			7,634,024
Ratios
Return on average assets		0.48	%		0.40	%		0.28	%		0.41	%		0.38	%
Return on average equity		6.43	%		5.57	%		3.62	%		4.99	%		4.65	%
Average equity to average assets		7.43	%		7.26	%		7.78	%		8.29	%		8.27	%
Selected Year-end Balances
Assets	$	656,793		$	632,304		$	577,253		$	548,230		$	532,202
Loans held for investment		357,950			369,970			356,871			341,829			320,132
Securities		101,952			102,136			107,201			117,889			100,500
Deposits		585,878			566,901			512,628			485,719			467,733
Borrowed funds		10,618			11,164			11,286			12,208			15,305
Shareholders’ equity		48,858			45,175			44,540			43,525			43,314
Selected Average Balances
Assets	$	645,681		$	612,403		$	572,630		$	534,296		$	521,699
Loans held for investment		369,540			369,419			348,980			334,317			316,485
Securities		100,775			103,223			113,025			107,396			112,348
Deposits		575,480			548,296			509,352			470,921			458,655
Borrowed funds		10,956			11,284			11,679			12,898			14,432
Shareholders’ equity		47,993			44,468			44,542			44,283			43,123

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 30-74 of this Annual Report. References to changes in assets and liabilities represent end-of-period balances unless otherwise noted. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary because of market and other factors. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission periodically. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” “potential”, and similar words. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, 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.

The Company’s total assets increased $24.5 million from $632.3 million at December 31, 2018 to $656.8 million at December 31, 2019. The primary driver of this increase was a $34.2 million increase in interest-earning deposits with banks. The increase was offset by a decrease in loans held for investment of $12.0 million related to large, unexpected pay downs during the year.

Cash and cash equivalents increased $37.3 million during the year ended December 31, 2019 as a result of an increase in customer deposits held by the bank and loan pay downs.

Investment securities consist of securities available for sale and securities held to maturity. Total investment securities decreased $184,000 or 0.18%, from $102.1million at December 31, 2018 to $102.0 million at December 31, 2019. During the year, the Company purchased $25.5 million in various securities to replenish the maturities in the portfolio. The Company also experienced an increase in the market value of the available for sale portfolio of $2.6 million due to external market rate changes. The pre-tax unrealized loss position of $2.2 million as of December 31, 2018 is now a $419,000 pre-tax unrealized gain position at December 31, 2019.

Loans held for investment decreased $12.0 million from $370.0 million at December 31, 2018 to $358.0 million at December 31, 2019. The decline in the portfolio was spread across several loan portfolio classes with commercial real estate construction experiencing the largest decline of $8.1 million or 26.00% and residential real estate experiencing a decline of $5.2 million or 6.78%. The decline was offset by increases in the commercial real estate loans, commercial loans, home equity lines and the consumer loan class, with commercial seeing the greatest increase of $1.9 million or 3.32%. Loans held for sale decreased by 38.63% or $1.9 million compared to the prior year. The allowance for loan loss was $2.0 million at December 31, 2019, which represents 0.55% of the loan portfolio, a decrease from 0.65% at December 31, 2018. The credit quality of consumer and commercial relationships continues to improve, which lowers the probability of default used to calculate the allowance for loan loss estimate, thus decreasing the allowance for loan loss as a percentage of the loan portfolio. Net recoveries were $281,000 at December 31, 2019 compared to net charge offs of $174,000 at December 31, 2018.

Other changes in our consolidated assets are related to premises and equipment, other real estate owned and other assets. During 2019, the Company adopted ASU 2016-02, “Leases, Topic 842”, which resulted in the recognition of a ROU asset, which is recorded in the premises and equipment subtotal (see Note 1). The value of this asset is $1.9 million at December 31, 2019, which is the largest driver in the $2.3 million increase in premises and equipment from $14.8 million at December 31, 2018 to $17.1 million at December 31, 2019. Throughout 2019, other real estate owned declined $553,000, from $1.0 million at December 31, 2018 to $494,000 at December 31, 2019. During 2019, the Company sold six pieces of foreclosed property totaling $598,000 realizing a loss of $40,000. The Company also had changes in reserves totaling $20,000 on the remaining property. However, the Company foreclosed on three loan relationships totaling $267,000, which were added to other real estate owned in 2019. Other assets decreased by $1.0 million from $11.9 million at December 31, 2018 to $10.9 million at December 31, 2019, driven by a decrease in the value of the deferred tax assets of $602,000 associated with the large increase in value of our available for sale securities.

Customer deposits continued to be our principal funding source in 2019. At December 31, 2019, deposits from our customers totaled $585.9 million, an increase of $19.0 million from $566.9 million at December 31, 2018. During 2019, demand noninterest bearing checking increased $20.6 million, while total time deposits and savings deposits increased $57.3 million and $2.4 million, respectively. These increases were offset by a decrease in interest checking and money market accounts of $61.3 million. During early 2019, as rates continued to increase from 2018, many customers moved into longer-term, maturity time-deposits before rates began to fall in mid-2019.

During 2019 the Company’s net borrowings decreased by $546,000. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2019 and 2018, there were no advances outstanding. The components of total borrowings include $10.0 million in junior subordinated long-term debt and $626,000 in master notes at December 31, 2019. During the third quarter of 2019, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. This offering replaced the Company’s $9.5 million of fixed rate junior subordinated debt that was issued in 2014 at a rate of 5.75%. The refinance allowed the Company to maintain 100% of the debt to be classified as Tier 2 capital, reduce interest expense by $25,000, and provide additional operating cash for the holding company. The 2019 offering raised $10.0 million, of which the entire $10.0 million was outstanding at December 31, 2019. These securities have a final maturity date of September 30, 2029 and may be redeemed by the Company after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company will have a twenty percent reduction beginning at September 30, 2024.

Other liabilities increased from $9.0 million at December 31, 2018 to $11.4 million at December 31, 2019, an increase of $2.3 million driven by the adoption of ASU 2016-02, “Leases, Topic 842”, which resulted in the recognition of a lease liability that is recorded in the other liabilities subtotal (see Note 1). The value of this liability is $2.0 million at December 31, 2019, which is the largest driver in the $2.3 million increase in other liabilities.

At December 31, 2019, total shareholders’ equity was $48.9 million, an increase of $3.7 million from December 31, 2018. Net income for the period was $3.1 million. Unrealized gains on investment securities net of tax increased $2.0 million. The Company repurchased 168,683 outstanding shares of common stock at an aggregate repurchase price of $850,000. The Company also paid $564,000 in dividends attributed to noncontrolling interest. At December 31, 2019, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Uwharrie Capital Corp reported net income of $3.1 million for the twelve months ended December 31, 2019, as compared to $2.5 million for the twelve months ended December 31, 2018, an increase of $610,000. Net income available to common shareholders was $2.5 million or $0.36 per common share for the year ended December 31, 2019, compared to net income available to common shareholders of $1.9 million or $0.26 per common share for the year ended December 31, 2018. Net income available to common shareholders is net income less any dividends paid on the aforementioned noncontrolling interest.

As with most financial institutions, the primary component of earnings for our subsidiary bank is net interest income. Net interest income is the difference between interest income, principally from the loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest bearing liabilities and capital.

Net interest income increased $211,000 to a total of $20.2. million for the twelve months ended December 31, 2019 from the $19.9 million earned in the same period of 2018. During 2019, growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $375,000. The average yield on our interest-earning assets increased 11 basis points to 3.96%, while the

average rate paid for interest-bearing liabilities increased 37 basis points. These increases resulted in a net decrease of 26 basis points in our interest rate spread, from 3.41% in 2018 to 3.15% in 2019. Our net interest margin for 2019 was 3.37%, compared to 3.53% in 2018. As a part of the loan agreements, a portion of the Company’s loan portfolio has interest rate floors and caps. The interest rate floor feature allows the Company to maintain a more a favorable interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest-bearing liabilities.

The provision for (recovery of) loan losses was ($588,000) and $90,000 for the twelve months ended December 31, 2019 and 2018, respectively. There were net loan recoveries of $281,000 for the twelve months ended December 31, 2019 as compared to net loan charge-offs of $174,000 during the same period of 2018. The reduction in provision was directly related to large, unexpected loan pay offs, as well as one large loan recovery. Please refer to the “Asset Quality” discussion below for further information.

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is a key strategic initiative to our long-term success. Noninterest income increased 8.8%, from $8.3 million in 2018, to $9.0 million in 2019, an increase of $726,000. A driving factor contributing to this increase was the increase in income from mortgage loan sales of $855,000 to $3.8 million for 2019 compared to $3.0 million during 2018. Total production for the mortgage division increased by $24.0 million from December 31, 2018 to December 31, 2019, as additional originators were added to our Mecklenburg County market.

Noninterest expense for the year ended December 31, 2019 was $25.9 million compared to $25.1 million for 2018, an increase of $813,000. Salaries and employee benefits, the largest component of noninterest expense, increased $942,000, from $16.2 million for the period ending December 31, 2018 to $17.1 million for 2019. Several factors contributed to this increase, including but not limited to, the full-year impact of our Rea Road branch as we expand into new markets, increased regulation requiring compliance-focused positions, and increased market/sales demand requiring additional commissions for mortgage lending. Foreclosed real estate expense, another major component of the change in noninterest expense, increased $255,000, from $45,000 in 2018 to $300,000 during 2019. The primary factor relating to this increase was the large write down of a property that had been held in other real estate owned since 2006. Professional fees decreased $129,000 for the period ending December 31, 2019 to $929,000 compared to $1.1 million for the same period in 2018 primarily related to the core system conversion that took place in August of 2018. In 2018, the Company incurred one-time training and implementation expenses related to the core system conversion. Data processing costs experienced a decrease totaling $217,000 for the comparable twelve-month period. During 2018, there was additional de-conversion expense related to the 2018 core conversion. Financial Table 5 reflects the additional breakdown of other noninterest expense.

The Company had income tax expense of $771,000 for 2019 at an effective tax rate of 19.98% compared to income tax expense of $579,000 in 2018 with an effective tax rate of 18.95%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance.

The effective tax rate for 2019 increased compared to 2018 due to higher pre-tax earnings and less available tax-exempt income.

Results of operations for the Years Ended December 31, 2018 and 2017 can be found in the 2018 10-K Annual Report filing.

During the second quarter of 2019, the Company transitioned its in-house incurred loss allowance for loan loss model to an external

vendor incurred loss model that is CECL-ready. The overall financial impact related to switching models is considered immaterial. As

a result of the change in models, there has been a change in the methodology for establishing the allowance for loan losses, as

Default in the allowance for loan loss model is now considered 90 days past due, whereas default was defined as a charge-off event in the previous model. This increases the probabilities of default for the Company, but reduces the loss given default

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

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

The allowance for loan loss represents management’s best estimate of an appropriate amount to provide for probable losses inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan loss, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan loss in conformity with GAAP, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan loss. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan loss 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 loan loss may adversely affect the Company’s financial condition and results of operations.

At December 31, 2019, the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $6.8 million compared to $4.5 million at December 31, 2018, a net increase of $2.3 million. Total nonaccrual loans, which are a component of impaired loans, increased $1.9 million from $1.0 million at December 31, 2018 to $2.9 million at December 31, 2019. During 2019, eight relationships totaling $3.1 million were added to impaired loans. These additions were offset by foreclosing two relationships for $190,000, pay offs of eight impaired relationships totaling $307,000, along with contractual pay downs on existing impaired loans.

The allowance expressed as a percentage of gross loans held for investment decreased ten basis points from 0.65% at December 31, 2018 to 0.55% at December 31, 2019. The decrease is a result of continued improvement in credit quality of the overall portfolio. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.61% at December 31, 2018 and 0.52% at December 31, 2019 which was driven by the net recoveries of the Company in 2019 of $281,000, reduction in past due loans 30-89

days from $1.1 million at December 31, 2018 to $614,000 at December 31, 2019, and improving credit quality of the overall loan portfolio as consumer credit scores continue to improve. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 3.43% to 2.06% for the same periods which was driven by the addition of one large relationship moving to impaired status. The relationship is $2.1 million; however, it is sufficiently collateralized to prevent loss so there is no reserve allocated in the impairment analysis. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans within the loan portfolio and adds additional loss based on economic uncertainty and volatility. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience, thus deriving the estimated loss scenario by FDIC call report codes. Together, these components, as well as a reserve for qualitative factors based on management’s discretion of economic conditions and portfolio concentrations form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data acquired from a third-party vendor representing a one-year loss horizon for each obligor. The Company updates the data inputs into the model; specifically, the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the credit scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. The Company will consider an update to credit scores in the fourth quarter based on economic and other conditions, if needed. The continued improvement in credit quality coupled with the continued trend of overall improvement in credit scores resulted in our average customer credit score increasing five points from 765 to 770 during 2019. The improvement in credit scores has been the major driver in the overall decrease in the allowance for loan losses.

The ratio of nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans increased from 0.28% at December 31, 2018, to 0.82% at December 31, 2019. The increase is related to the large impaired relationship discussed previously, along with the decline of the overall portfolio.

Management believes the current level of the allowance for loan loss is appropriate in light of the risk inherent in the loan portfolio.

During 2019, other real estate owned decreased $553,000. The Company sold six pieces of foreclosed property totaling $598,000 realizing a net loss of $40,000. The Company also had recoveries of reserves totaling $20,000 on the remaining existing property. However, the Company foreclosed on three loan relationships totaling $267,000, which were added to other real estate owned in 2019.

Troubled debt restructured loans at December 31, 2019 totaled $3.9 million compared to $3.4 million at December 31, 2018 and are included in impaired loans. At December 31, 2019, all troubled debt restructured loans were on an accruing basis with the exception of one relationship totaling $26,000 that was in nonaccrual.

The following nonperforming loan table shows the comparison for the past five years:

Nonperforming Assets
(dollars in thousands)
	At December 31,
	2019			2018			2017			2016			2015
Nonperforming Assets:
Accruing loans past due 90 days or more	$	—		$	—		$	—		$	—		$	—
Nonaccrual loans		2,922			1,044			1,025			1,450			783
Other real estate owned		494			1,047			2,349			4,176			4,994
Total nonperforming assets	$	3,416		$	2,091		$	3,374		$	5,626		$	5,777
Allowance for loan losses	$	1,981		$	2,374		$	2,458		$	2,707		$	2,884
Nonperforming loans to total loans		0.82	%		0.28	%		0.29	%		0.42	%		0.24	%
Allowance for loan losses to total loans		0.55	%		0.65	%		0.69	%		0.79	%		0.90	%
Nonperforming assets to total assets		0.52	%		0.33	%		0.58	%		1.03	%		1.09	%
Allowance for loan losses to nonperforming loans		67.80	%		227.38	%		239.80	%		186.69	%		368.23	%

The Company continues to maintain capital ratios that support its asset growth. In 2013, bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The rules include 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%, require a minimum ratio of total capital to risk-weighted assets of 8.00%, and require a minimum Tier 1 leverage ratio of 4.00%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer began phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the rules. The rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements phased in over a multi-year schedule, becoming fully phased-in on January 1, 2019. Pursuant to the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from Basel III. As of December 31, 2018, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under applicable capital adequacy rules.

In January 2013, the Company’s subsidiary bank issued $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000.

During the third quarter of 2013, the Company’s subsidiary bank raised an additional $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, 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. The offering raised $2.8 million less issuance costs of $23,000.

The Company expects to continue to exceed required minimum capital ratios without altering current operations or strategy. Note 15 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

The Board of Directors of Uwharrie Capital Corp declared a 2% stock dividend in each of 2019, 2018, and 2017. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends.

Liquidity, the ability to raise cash when needed without adversely affecting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 3, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities. Other funding sources at year-end 2019 included $28.0 million in federal funds lines of credit from correspondent banks and approximately $56.0 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $19.2 million. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.

At December 31, 2019, short-term borrowings amounted to $626,000. Long-term debt at that date consisted of junior subordinated debt of $10.0 million.

Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2019.

A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and/or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Refer to Note 1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.

The allowance for loan loss is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan loss is evaluated both individually and collectively by loan class on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences. The nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay; estimated value of any underlying collateral and prevailing economic conditions are the key factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination. Management’s determination of the realization of the net deferred tax asset is based upon management’s evaluation of positive and negative evidence related to cumulative pretax earnings over a three-year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.

Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. See Note 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Net Interest Income (Margin) is the single largest component of revenue for the Company. Net Interest Margin is the difference between the yield on earning assets and interest paid on interest-bearing liabilities. The margin can vary over time as interest rates change. The variance fluctuates based on both the timing (repricing) and magnitude of maturing assets and liabilities.

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or “gap” between rate sensitive assets and liabilities over various periods. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates along with multiple other forecasted assumptions. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional gap analysis because the gap analysis ignores optionality embedded in the balance sheet, such as prepayments or changes based on interest rates. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rate environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary bank, using a static balance sheet for a two-year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections for a one-year horizon, indicates a negative impact of (16.70%) on Net Interest Income (Margin) in rates down scenario and a positive impact of 12.10% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve-month forecast, the subsidiary bank is asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest-bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. The subsidiary bank has the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

The principal goals for asset liability management for the Company are to maintain adequate levels and sources of liquidity and to manage interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on both interest-sensitive assets and interest-sensitive liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result of changes in market interest rates. To that end, management has recommended and the board has approved policy limits that minimize the downside risk from interest rate shifts. The aforementioned ratios are within those stated limits of -18% for the respective modeled scenarios at the subsidiary bank and combined. Managing interest rate risk is an important factor to the long-term viability of the Company since Net Interest Income (Margin) is such a large component of earnings. The Company’s Asset Liability Management Committee (ALCO) monitors market changes in interest rates and assists with the pricing of loans and deposit products while considering the funding source needs, asset growth projections, and necessary operating liquidity.

	2019							2018							2017
			Interest		Average					Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income		Yield
(dollars in thousands)	Balance		Expense		Rate (1)			Balance		Expense		Rate (1)			Balance		Expense		Rate (1)
Interest-earning assets
Taxable securities	$	84,206		1,680		2.00	%	$	88,328		1,497		1.69	%	$	95,831		1,582		1.65	%
Non-taxable securities (1)		16,569		408		3.08	%		17,580		434		3.05	%		17,194		439		3.61	%
Short-term investments		130,985		2,702		2.06	%		93,566		1,737		1.86	%		65,244		750		1.15	%
Taxable loans (2)		362,728		18,727		5.16	%		362,002		17,954		4.96	%		340,547		16,301		4.79	%
Non-taxable loans (1)		9,523		250		3.28	%		10,128		251		3.06	%		10,684		268		3.54	%
Total interest-earning assets		604,011		23,767		3.96	%		571,604		21,873		3.85	%		529,500		19,340		3.71	%
Non-earning assets
Cash and due from banks		2,695							5,905							6,648
Premises and equipment, net		16,740							15,037							14,211
Interest receivable and other		22,235							19,857							22,271
Total non-earning assets		41,670							40,799							43,130
Total assets	$	645,681						$	612,403						$	572,630
Interest-bearing liabilities
Savings deposits	$	56,589	$	102		0.18	%	$	52,484	$	91		0.17	%	$	44,923	$	49		0.11	%
Interest checking & MMDA		271,496		1,435		0.53	%		304,997		948		0.31	%		279,216		413		0.15	%
Time deposits		101,717		1,450		1.43	%		59,260		273		0.46	%		66,955		252		0.38	%
Total deposits		429,802		2,987		0.69	%		416,741		1,312		0.31	%		391,094		714		0.18	%
Short-term borrowed funds		905		15		1.66	%		1,641		16		0.98	%		2,145		16		0.75	%
Long-term debt		10,051		563		5.60	%		9,643		554		5.75	%		9,534		547		5.74	%
Total interest-bearing liabilities		440,758		3,565		0.81	%		428,025		1,882		0.44	%		402,773		1,277		0.32	%
Noninterest liabilities
Transaction deposits		145,678							131,556							118,258
Interest payable and other		11,252							8,354							7,057
Total liabilities		597,688							567,935							528,088
Shareholders’ equity		47,993							44,468							44,542
Total liabilities and shareholders' equity	$	645,681						$	612,403						$	572,630
Interest rate spread						3.15	%						3.41	%						3.39	%
Net interest income and net interest margin			$	20,202		3.37	%			$	19,991		3.53	%			$	18,063		3.47	%

	2019 Versus 2018									2018 Versus 2017
							Net									Net
(dollars in thousands)	Volume			Rate			Change			Volume			Rate			Change
Interest-earning assets
Taxable securities	$	(76	)	$	259		$	183		$	(126	)	$	41		$	(85	)
Non-taxable securities		(25	)		(1	)		(26	)		10			(15	)		(5	)
Short-term investments		733			232			965			426			561			987
Taxable loans		37			736			773			1,046			607			1,653
Non-taxable loans		(15	)		14			(1	)		(14	)		(3	)		(17	)
Total interest-earning assets		654			1,240			1,894			1,342			1,191			2,533
Interest-bearing liabilities
Savings deposits		7			4			11			11			31			42
Transaction and MMDA deposits		(141	)		628			487			59			476			535
Other time deposits		400			777			1,177			(32	)		53			21
Short-term borrowed funds		(10	)		9			(1	)		(4	)		4			0
Long-term debt		23			(14	)		9			6			1			7
Total interest-bearing liabilities		279			1,404			1,683			40			565			605
Net interest income	$	375		$	(164	)	$	211		$	1,302		$	626		$	1,928

The above table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to the change attributable to volume and the change attributable to rate.

	December 31, 2019							December 31, 2018							December 31, 2017
			Estimated							Estimated							Estimated
	Amortized		Fair		Book			Amortized		Fair		Book			Amortized		Fair		Book
(dollars in thousands)	Cost		Value		Yield(1)			Cost		Value		Yield(1)			Cost		Value		Yield(1)
Securities available for sale
U.S. Treasury
Due within twelve months	$	4,976	$	5,012		2.66	%	$	—	$	—		—		$	—	$	—		—
Due after one but within five years		—		—		—			4,944		4,955		2.66	%		—		—		—
		4,976		5,012		2.66	%		4,944		4,955		2.66	%		—		—		—
U.S. Government agencies
Due within twelve months		—		—		—			17,504		17,398		1.24	%		—		—		—
Due after one but within five years		18,958		18,945		1.55	%		25,093		24,398		1.63	%		42,737		41,968		1.47	%
Due after five but within ten years		6,911		6,741		1.94	%		6,626		6,399		1.78	%		8,678		8,558		1.91	%
Due after ten years		—		—		—			3,712		3,721		2.65	%		5,107		5,089		1.79	%
		25,869		25,686		1.66	%		52,935		51,916		1.59	%		56,522		55,615		1.57	%
Mortgage-backed securities
Due after one but within five years		7,137		7,123		1.95	%		1,557		1,544		2.57	%		1,148		1,154		2.46	%
Due after five but within ten years		16,685		17,059		2.62	%		7,815		7,587		2.06	%		6,659		6,582		2.03	%
Due after ten years		14,483		14,394		2.37	%		7,845		7,571		2.09	%		13,446		13,155		1.94	%
		38,305		38,576		2.40	%		17,217		16,702		2.12	%		21,253		20,891		2.00	%
State and political
Due within twelve months		—		—		—			1,010		1,014		3.25	%		810		820		5.95	%
Due after one but within five years		1,334		1,336		3.64	%		1,079		1,064		3.23	%		1,863		1,866		3.37	%
Due after five but within ten years		1,398		1,423		2.74	%		1,688		1,646		3.13	%		1,971		1,943		3.48	%
Due after ten years		11,205		11,462		3.02	%		9,596		9,231		3.10	%		9,724		9,570		2.45	%
		13,937		14,221		3.05	%		13,373		12,955		3.12	%		14,368		14,199		2.91	%
Corporate Bonds
Due within twelve months		2,808		2,815		2.51	%		—		—		—			—		—		—
Due after one but within five years		2,210		2,214		2.75	%		5,030		4,771		2.94	%		2,827		2,821		2.15	%
Due after five but within ten years		—		—		—			—		—		—			2,215		2,217		1.50	%
		5,018		5,029		2.62	%		5,030		4,771		2.94	%		5,042		5,038		1.86	%
Total Securities available for sale
Due within twelve months		7,784		7,827		2.61	%		18,514		18,412		1.35	%		810		820		5.95	%
Due after one but within five years		29,639		29,618		1.83	%		37,703		36,732		2.02	%		48,575		47,809		1.61	%
Due after five but within ten years		24,994		25,223		2.44	%		16,129		15,632		2.06	%		19,523		19,300		2.06	%
Due after ten years		25,688		25,856		2.65	%		21,153		20,523		2.65	%		28,277		27,814		2.09	%
	$	88,105	$	88,524		2.31	%	$	93,499	$	91,299		2.04	%	$	97,185	$	95,743		1.88	%

	December 31, 2019							December 31, 2018							December 31, 2017
			Estimated							Estimated							Estimated
	Amortized		Fair		Book			Amortized		Fair		Book			Amortized		Fair		Book
(dollars in thousands)	Cost		Value		Yield(1)			Cost		Value		Yield(1)			Cost		Value		Yield(1)
Securities held to maturity
U.S. Government agencies
Due after one but within five years	$	578	$	583		2.69	%	$	—	$	—		—		$	—	$	—		—
Due after five but within ten years		—		—		—			855		843		2.42	%		1,348		1,339		2.49	%
		578		583		2.69	%		855		843		2.42	%		1,348		1,339		2.49	%
State and political
Due within twelve months		1,501		1,502		1.87	%		—		—		—			—		—		—
Due after one but within five years		4,397		4,457		2.40	%		5,545		5,493		2.21	%		3,694		3,681		2.28	%
Due after five but within ten years		928		929		2.15	%		1,332		1,329		2.42	%		3,231		3,231		3.03	%
		6,826		6,888		2.25	%		6,877		6,822		2.25	%		6,925		6,912		2.63	%
Corporate Bonds
Due within twelve months		3,024		3,028		2.76	%		1,543		1,534		2.73	%		—		—		—
Due after one but within five years		—		—		—			1,562		1,551		2.79	%		3,185		3,210		2.76	%
Due after five but within ten years		3,000		3,000		5.50	%		—		—		—			—		—		—
		6,024		6,028		4.13	%		3,105		3,085		2.76	%		3,185		3,210		2.76	%
Total Securities held to maturity
Due within twelve months		4,525		4,530		2.46	%		1,543		1,534		2.73	%
Due after one but within five years		4,975		5,040		2.43	%		7,107		7,044		2.34	%		3,694		3,681		2.51	%
Due after five but within ten years		3,928		3,929		4.71	%		2,187		2,172		2.42	%		7,764		7,780		2.87	%
	$	13,428	$	13,499		3.11	%	$	10,837	$	10,750		2.41	%	$	11,458	$	11,461		2.65	%

	At December 31,
	2019						2018						2017
				% of Total						% of Total						% of Total
(dollars in thousands)	Amount			Loans			Amount			Loans			Amount			Loans
Loan type:
Commercial	$	59,075			16.49	%	$	57,176			15.45	%	$	54,912			15.38	%
Real estate - construction		30,643			8.55	%		38,946			10.52	%		45,210			12.66	%
Real estate - residential		122,586			34.22	%		129,105			34.88	%		128,529			36.01	%
Real estate - commercial		130,998			36.57	%		130,634			35.29	%		114,712			32.13	%
Consumer		12,957			3.62	%		12,159			3.29	%		10,774			3.02	%
Other		1,939			0.54	%		2,110			0.57	%		2,838			0.80	%
Total loans		358,198			100.00	%		370,130			100.00	%		356,975			100.00	%
Less:
Allowance for loan losses		(1,981	)					(2,374	)					(2,458	)
Unearned net loan fees		(248	)					(160	)					(104	)
Net loans	$	355,969					$	367,596					$	354,413

	At or for the Year Ended December 31,
(dollars in thousands)	2019			2018			2017			2016			2015
Allowance for loan losses at beginning of year	$	2,374		$	2,458		$	2,707		$	2,884		$	3,738
Provision for (recovery of) loan losses		(588	)		90			(236	)		(88	)		(620	)
Other		(86	)		—			—			—			—
Loan charge-offs:
Commercial		10			89			16			76			34
Real estate		2			158			107			172			427
Consumer		148			79			85			142			128
Total charge-offs		160			326			208			390			589
Recoveries of loans previously charged off:
Commercial		14			28			75			19			16
Real estate		379			100			82			209			278
Consumer		48			24			38			73			61
Total recoveries		441			152			195			301			355
Net charge-offs (recoveries)		(281	)		174			13			89			234
Allowance for loan losses at end of year	$	1,981		$	2,374		$	2,458		$	2,707		$	2,884
Net charge-offs (recoveries) as a percent of average loans		(0.08	)%		0.05	%		0.00	%		0.03	%		0.07	%

	2019					2018					2017
(dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate
At year-end
Master notes and other secured borrowings		626		0.89	%		1,190		1.49	%		1,752		0.50	%
Notes payable		—		0.00	%		—		0.00	%		—		0.00	%
Short-term line of credit		—		0.00	%		—		0.00	%		—		0.00	%
	$	626		0.89	%	$	1,190		1.49	%	$	1,752		0.50	%
Average for the year
Federal funds purchase	$	2		3.04	%	$	2		2.92	%	$	2		1.95	%
Master notes and other secured borrowings		904		1.61	%		1,638		1.00	%		1,861		0.28	%
Notes payable		—		0.00	%		—		0.00	%		6		5.81	%
Short-term line of credit		—		0.00	%		—		0.00	%		275		3.58	%
Short-term advances from FHLB		—		0.00	%		—		0.00	%		—		0.00	%
	$	906		1.62	%	$	1,640		1.00	%	$	2,144		0.72	%
Maximum month-end balance
Master notes and other secured borrowings		1,486					2,006					2,448
Notes payable		—					—					12
Short-term line of credit		—					—					1,000
Short-term advances from FHLB		—					—					—

December 31, 2018	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Gov’t agencies		1,924		29		47,814		1,037		49,738		1,066
GSE-Mortgage-backed securities and CMO’s		526		6		15,602		509		16,128		515
State and political		—		—		11,109		423		11,109		423
Corporate bonds		1,989		224		1,971		41		3,960		265
Total securities available for sale	$	4,439	$	259	$	76,496	$	2,010	$	80,935	$	2,269

Year ending December 31,
(dollars in thousands)
2020	$	406
2021		352
2022		298
2023		243
2024		188
Thereafter		236
Total	$	1,723

	2019			2018
Weighted average remaining life	261 months			259 months
Weighted average discount rate		12	%		12	%
Weighted average coupon		4.04	%		4.02	%
Weighted average prepayment speed		182	%		132	%

	2019		2018
	(dollars in thousands)
Land	$	3,192	$	3,215
Building and improvements		15,783		15,150
ROU assets		1,945		—
Furniture and equipment		8,518		8,808
Total fixed assets		29,438		27,173
Less accumulated depreciation		12,376		12,373
Net fixed assets	$	17,062	$	14,800

	Twelve Months Ended December 31,
	2019
	(in thousands except percent and period data)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	357
ROU assets obtained in exchange for new operating lease liabilities		1,945
Weighted-average remaining lease term - operating leases, in years		7.6
Weighted-average discount rate - operating leases		2.9%

	Year ended December 31,
	2019			2018			2017
	(dollars in thousands)
Beginning Balance	$	(1,694	)	$	(1,107	)	$	(1,318	)
Accumulated Other comprehensive income (loss) before reclassifications, net of ($595), $171 and ($185) tax effect, respectively		1,989			(587	)		356
Amounts reclassified from accumulated other comprehensive income, net of ($7), $0, and ($4) tax effect, respectively		28			—			10
Net current-period other comprehensive loss		2,017			(587	)		366
Tax Cuts and Jobs Act of 2017, reclassification from AOCI to retained earnings, tax effect		—			—			(155	)
Ending Balance	$	323		$	(1,694	)	$	(1,107	)

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	4,976	$	36	$	—	$	5,012
U.S. Government agencies		25,869		18		201		25,686
GSE - Mortgage-backed securities and CMO’s		38,305		413		142		38,576
State and political subdivisions		13,937		329		45		14,221
Corporate bonds		5,018		11		—		5,029
Total securities available for sale	$	88,105	$	807	$	388	$	88,524

	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Securities available for sale
Due within one year	$	7,784	$	7,827
Due after one but within five years		22,502		22,496
Due after five but within ten years		8,310		8,163
Due after ten years		11,204		11,462
Mortgage backed securities		38,305		38,576
	$	88,105	$	88,524

Non-Commercial	2019			2018			2017
	(dollars in thousands)
Balance, beginning of year	$	1,040		$	1,057		$	1,303
Provision (recovery) charged to operations		(17	)		(42	)		(164	)
Charge-offs		(149	)		(81	)		(177	)
Recoveries		74			106			95
Net (charge-offs) recoveries		(75	)		25			(82	)
Other		(54	)		—			—
Balance, end of year	$	894		$	1,040		$	1,057

December 31, 2019	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	32	$	3,660	$	1,055	$	209,456	$	1,087	$	213,116
Non-Commercial		109		3,175		785		141,659		894		144,834
Total	$	141	$	6,835	$	1,840	$	351,115	$	1,981	$	357,950

December 31, 2019	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	56,151	$	2,921	$	3	$	—	$	59,075
Real estate - commercial		126,498		1,194		3,306		—		130,998
Other real estate construction		21,253		1,477		313		—		23,043
Real estate 1 - 4 family construction		7,600		—		—		—		7,600
Real estate - residential		67,647		2,464		1,011		—		71,122
Home equity		50,255		879		82		—		51,216
Consumer loans		12,877		79		1		—		12,957
Other loans		1,939		—		—		—		1,939
Total	$	344,220	$	9,014	$	4,716	$	—	$	357,950

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

	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
December 31, 2019
Extended payment terms		—	$	—		—	$	—		—	$	—		—	$	—
Other		1		37		5		1,940		—		—		—		—
Total		1	$	37		5	$	1,940		—	$	—		—	$	—

December 31,
(dollars in thousands)
2020	$	381
2021		347
2022		225
2023		229
2024		233
Thereafter		846
Total lease payments		2,261
Less: Interest		(249	)
Present value of lease liabilities	$	2,012

	Time Deposits		Other
Year ending December 31,	$250,000 and Over		Time Deposits
	(dollars in thousands)
2020		53,866		39,650
2021		1,507		15,522
2022		309		2,977
2023		—		610
2024		—		882
Thereafter		—		—
Total	$	55,682	$	59,641

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

	Payments Due by Period (in thousands)
			On Demand
			or less						After
	Total		than 1 year		1-3 Years		3-5 Years		5 Years
Contractual Obligations
Short-term debt	$	626	$	626	$	—	$	—	$	—
Long-term debt		9,992		—		—		—		9,992
Operating leases		2,261		381		572		462		846
Total contractual cash obligations, excluding deposits		12,879		1,007		572		462		10,838
Deposits		585,878		561,783		20,460		1,873		1,762
Total contractual cash obligations, including deposits	$	598,757	$	562,790	$	21,032	$	2,335	$	12,600

	December 31, 2019
	One Year		One to		Over Five
(dollars in thousands)	or Less		Five Years		Years		Total
Commercial and agricultural	$	10,486	$	14,203	$	34,386	$	59,075
Real estate – construction		12,641		3,936		14,066		30,643
Total selected loans	$	23,127	$	18,139	$	48,452	$	89,718
Fixed rate loans	$	10,705	$	24,453	$	39,929	$	75,087
Sensitivity to rate changes:
Variable interest rates	$	23,652	$	18,044	$	241,167	$	282,863

			Over 3		Over 6
	3 Months		Months to		Months to		Over
(dollars in thousands)	or Less		6 Months		12 Months		12 Months		Total
Time Deposits of $250,000 or more	$	47,485	$	3,401	$	2,980	$	1,816	$	55,682
Other Time Deposits		12,169		11,654		15,827		19,991		59,641
	$	59,654	$	15,055	$	18,807	$	21,807	$	115,323

Merlin Amirtharaj	Thomas M. Hearne, Jr.	James E. Nance
Retired; previously,	Retired; previously,	Founder and Managing Member
Associate Vice President of the	Geopavement Engineer	North State Acquisitions, LLC
School of Business and Technology	North Carolina Department
Stanly Community College	of Transportation	Chris M. Poplin
		Chief Financial Officer and
Dean M. Bowers	Matthew R. Hudson	Chief Operating Officer
Regional Sales Manager/Co-Owner	General Manager and Vice President	Faison Enterprises, Inc.
Quality Equipment, LLC	Hudson Pool Distributors, Inc.
		Frank A. Rankin, III
Joe S. Brooks	Harvey H. Leavitt, III	Board Chair
Owner and Manager	Owner and Operator	Chair, Board of Directors
Brothers Precision Tool Co.	Leavitt Funeral Home	Concord Engineering &
		Surveying, Inc.
James O. Campbell	W. Chester Lowder
Vice President of Construction Sales	Retired; previously,	Randy T. Russell
AvidXchange, Inc.	Director of Livestock Program	President
	Public Policy Division	Sports Med Properties, LLC
Tara G. Eudy	NC Farm Bureau Federation, Incorporated
Board Vice Chair		Vernon A. Russell
President and Treasurer	Wesley A. Morgan	Attorney and Owner
Carolina Title Company, Inc.	General Manager	Vernon A. Russell
	Rolling Hills Gin, LLC	Attorney at Law, PLLC
Deidre B. Foster
Community Volunteer and	Cynthia L. Mynatt	Matthew A. Shaver, MD
Non-Profit Board Member	President	General Surgeon
	Ben Mynatt Buick - GMC	Atrium Health Stanly
Allen K. Furr		and Medical Director of
Secretary and Treasurer		Albemarle Surgical Associates
PEJA, Inc.
DBA East Albemarle Xpress Lube

Executive Officers
	Roger L. Dick	R. David Beaver, III
	President and	Chief Financial Officer and
	Chief Executive Officer	Chief Risk Officer
	Uwharrie Capital Corp;	Uwharrie Capital Corp;
	Chief Executive Officer	President and
	Uwharrie Bank	Chief Financial Officer
		Uwharrie Bank