uwhr-ex13_295.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)	2020			2019			Percent Increase (Decrease)
For the year:
Net income	$	8,107		$	3,087			162.62	%
Net income available to common shareholders	$	7,540		$	2,523			198.85	%
Basic net income per common share (1)	$	1.06		$	0.34			211.76	%
Diluted net income per common share (1)	$	1.06		$	0.34			211.76	%
Weighted average common shares outstanding (diluted) (1)		7,130,772			7,343,247			(2.89	)%
At year-end:
Total assets	$	827,770		$	656,793			26.03	%
Total earning assets		772,936			607,161			27.30	%
Loans held for investment		467,741			357,950			30.67	%
Total interest-bearing liabilities		549,110			446,213			23.06	%
Shareholders’ equity		59,237			48,858			21.24	%
Book value per common share (1)	$	6.89		$	5.28			30.49	%
Averages for the year:
Total assets	$	738,060		$	645,681			14.31	%
Total earning assets		695,708			604,011			15.18	%
Loans held for investment		431,235			369,540			16.70	%
Total interest-bearing liabilities		487,307			440,758			10.56	%
Shareholders’ equity		52,732			47,993			9.87	%
Financial ratios (in percentage):
Return on average assets		1.10	%		0.48	%
Return on average shareholders’ equity		15.37	%		6.43	%
Average equity to average assets		7.14	%		7.43	%
Net interest margin (fully tax equivalent basis)		3.18	%		3.37	%
Allowance as % of loans at year-end		0.94	%		0.55	%
Allowance as % of nonperforming loans		117.16	%		67.82	%
Nonperforming loans to total loans		0.80	%		0.82	%
Nonperforming assets to total assets		0.45	%		0.52	%
Net loan charge-offs (recoveries) to average loans		(0.01	)%		(0.08	)%

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. On December 31, 2020, there were approximately 3,135 shareholders of record of the Company’s common stock. This number does not include shareholders for whom shares are held in “nominee” or “street” name.

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 2020, 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. There were no cash dividends declared on the Company’s common stock in 2020 or 2019. The timing and amount of any cash dividends paid depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. The Company can offer no assurance that the Board of Directors will declare or pay cash dividends in any future period.

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the "Company") as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

The Company’s allowance for loan losses (ALL) was $4.4 million as of December 31, 2020. As described in Note 1 and Note 4 to the consolidated financial statements, the ALL 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. The ALL for individually evaluated loans is based upon discounted cash flows or the net realizable value of the collateral. Management’s process is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We identified the Company’s estimate of the ALL as a critical audit matter. The principal considerations for our determination included the high degree of judgment and subjectivity in management’s identification and measurement of the qualitative factors. This required a high degree of judgment in selecting the auditor procedures to evaluate management’s estimate of the ALL, particularly as it relates to the identification and measurement of the qualitative factors.

The primary procedures we performed to address this critical audit matter included:

	2020			2019
	(dollars in thousands)
ASSETS
Cash and due from banks	$	6,301		$	7,520
Interest-earning deposits with banks		82,567			147,678
Cash and cash equivalents		88,868			155,198
Securities available for sale, at fair value		191,513			88,524
Securities held to maturity (fair value $29,600 and $13,499, respectively)		28,207			13,428
Equity securities, at fair value		1,352			—
Loans held for sale		6,959			2,946
Loans:
Loans held for investment		467,741			357,950
Less allowance for loan losses		(4,402	)		(1,981	)
Net loans held for investment		463,339			355,969
Premises and equipment, net		16,982			17,062
Interest receivable		2,524			1,666
Restricted stock		1,166			1,144
Bank owned life insurance		8,936			8,796
Other real estate owned		—			494
Prepaid assets		1,146			714
Loan servicing assets		3,957			1,723
Mortgage interest rate lock commitments, at fair value		2,073			—
Other assets		10,748			9,129
Total assets	$	827,770		$	656,793
LIABILITIES
Deposits:
Demand noninterest-bearing	$	205,788		$	150,283
Interest checking and money market accounts		381,502			263,136
Savings deposits		74,792			57,136
Time deposits, $250,000 and over		28,825			55,682
Other time deposits		52,289			59,641
Total deposits		743,196			585,878
Short-term borrowed funds		710			626
Long-term debt		10,992			9,992
Interest payable		21			55
Mortgage forward sales commitments		388			—
Other liabilities		13,226			11,384
Total liabilities		768,533			607,935
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 7,052,143 and 7,095,920, at December 31, 2020 and 2019, respectively		8,815			8,870
Additional paid-in capital		12,607			12,784
Undivided profits		23,000			16,226
Accumulated other comprehensive income		4,160			323
Total Uwharrie Capital shareholders’ equity		48,582			38,203
Noncontrolling interest		10,655			10,655
Total shareholders’ equity		59,237			48,858
Total liabilities and shareholders’ equity	$	827,770		$	656,793

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

	2020			2019			2018
	(dollars in thousands, except share
	and per share data)
Interest Income
Loans, including fees	$	20,082		$	18,977		$	18,205
Investment securities:
US Treasury		74			131			45
US Government agencies and corporations		1,598			1,490			1,405
State and political subdivisions non-taxable		732			408			434
State and political subdivisions taxable		898			59			47
Equity securities		51			—			—
Interest-earning deposits with banks and federal funds sold		640			2,702			1,737
Total interest income		24,075			23,767			21,873
Interest Expense
Interest checking and money market accounts		716			1,435			948
Savings deposits		62			102			91
Time deposits $250,000 and over		370			830			69
Other time deposits		527			620			204
Short-term borrowed funds		2			15			16
Long-term debt		559			563			554
Total interest expense		2,236			3,565			1,882
Net interest income		21,839			20,202			19,991
Provision for (recovery of) loan losses		2,387			(588	)		90
Net interest income after provision for (recovery of) loan losses		19,452			20,790			19,901
Noninterest Income
Service charges on deposit accounts		1,027			1,348			1,220
Other service fees and commissions		2,619			2,687			2,621
Interchange and card transaction fees, net		917			826			648
Gain (loss) on sale of securities		71			(35	)		—
Unrealized gain on equity security		451			—			—
Income from mortgage banking		14,714			3,835			2,980
Other income		1,078			344			810
Total noninterest income		20,877			9,005			8,279
Noninterest Expense
Salaries and employee benefits		19,874			17,122			16,180
Net occupancy expense		1,781			1,693			1,616
Equipment expense		803			720			734
Data processing costs		669			706			923
Loan costs		583			359			306
Foreclosed real estate expense		12			300			45
Professional fees and services		927			929			1,058
Marketing and donations		972			758			786
Electronic banking expense		414			424			401
Software amortization and maintenance		1,263			925			924
FDIC insurance		301			132			234
Other noninterest expense		2,286			1,869			1,917
Total noninterest expense		29,885			25,937			25,124
Income before income taxes		10,444			3,858			3,056
Income taxes		2,337			771			579
Net income	$	8,107		$	3,087		$	2,477
Consolidated net income	$	8,107		$	3,087		$	2,477
Less: Net income attributable to noncontrolling interest		(567	)		(564	)		(570	)
Net income attributable to Uwharrie Capital Corp and common shareholders		7,540			2,523			1,907
Net income per common share
Basic	$	1.06		$	0.34		$	0.26
Diluted	$	1.06		$	0.34		$	0.26
Weighted average common shares outstanding
Basic		7,130,772			7,343,247			7,373,919
Diluted		7,130,772			7,343,247			7,373,919

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, 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 loss		—			—			—			—			(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
Net Income		—			—			—			7,540			—			567			8,107
Repurchase of common stock		(181,558	)		(227	)		(764	)		—			—			—			(991	)
2% stock dividend		137,781			172			587			(759	)		—			—			—
Cash paid – fractional shares		—			—			—			(7	)		—			—			(7	)
Other comprehensive income		—			—			—			—			3,837			—			3,837
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—			—			(418	)		(418	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—			—			(149	)		(149	)
Balance, December 31, 2020		7,052,143		$	8,815		$	12,607		$	23,000		$	4,160		$	10,655		$	59,237

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

	2020			2019			2018
	(dollars in thousands)
Cash flows from operating activities
Net income	$	8,107		$	3,087		$	2,477
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,129			1,074			1,067
Right of use asset amortization		329			313			278
Provision for (recovery of) loan losses		2,387			(588	)		90
(Gain) loss on sale of securities available for sale		(71	)		35			—
(Gain) loss on sale of premises and equipment		69			(6	)		4
(Gain) loss on sale of OREO		(24	)		40			(11	)
Gain on sale of mortgage loans		9,401			2,877			1,349
OREO write-downs		21			237			(12	)
Unrealized gain on equity securities		(451	)		—			—
Net amortization of premium on investment securities available for sale		537			555			767
Net amortization of premium on investment securities held to maturity		145			139			146
Amortization of mortgage servicing rights		1,132			831			663
Originations and purchases of mortgage loans for sale		(342,680	)		(124,973	)		(97,764	)
Proceeds from sales of mortgage loans for sale		328,160			123,134			95,369
Mortgage interest rate lock commitments		(2,073	)		—			—
Loan servicing assets		(3,366	)		(704	)		(388	)
Accrued interest receivable		(857	)		97			(54	)
Prepaid assets		(432	)		(156	)		228
Cash surrender value of life insurance		(140	)		(125	)		(125	)
Miscellaneous other assets		(390	)		1,125			(34	)
Deferred income taxes		(151	)		15			(39	)
Accrued interest payable		(34	)		39			(132	)
Mortgage forward sales commitments		388			—			—
Miscellaneous other liabilities		1,021			(6	)		397
Net cash provided by operating activities		2,157			7,040			4,276
Cash flows from investing activities
Proceeds from sales of investment securities available for sale		17,358			3,351			—
Proceeds from maturities, calls and paydowns of securities available for sale		11,206			23,919			7,853
Proceeds from maturities, calls and paydowns of securities held to maturity		5,656			270			475
Purchase of investment securities available for sale		(127,035	)		(22,466	)		(4,934	)
Purchase of investment securities held to maturity		(20,580	)		(3,000	)		—
Purchase of equity securities		(901	)		—			—
Purchase of investments in other assets		(1,120	)		—			—
Net change in restricted stock		(22	)		(50	)		(27	)
Net (increase) decrease in loans		(109,757	)		12,034			(13,433	)
Purchase of premises and equipment		(720	)		(1,576	)		(1,107	)
Proceeds from sale of OREO		497			543			1,533
Proceeds from sale of premises, equipment and other assets		94			189			4
Net cash provided (used) by investing activities		(225,324	)		13,214			(9,636	)
Cash flows from financing activities
Net increase in deposit accounts		157,318			18,977			54,273
Net increase (decrease) in federal funds purchased and other short-term borrowings		84			(564	)		(562	)
Proceeds from long-term borrowings		1,000			9,992			440
Repayment of long-term debt		—			(9,974	)		—
Repurchase of common stock, net		(991	)		(850	)		(747	)
Stock option exercise		—			—			65
Dividends paid on preferred stock (noncontrolling interest)		(567	)		(564	)		(570	)
Cash paid for fractional shares		(7	)		(7	)		(8	)
Net cash provided by financing activities		156,837			17,010			52,891
Increase (decrease) in cash and cash equivalents		(66,330	)		37,264			47,531
Cash and cash equivalents, beginning of year		155,198			117,934			70,403
Cash and cash equivalents, end of year	$	88,868		$	155,198		$	117,934
Supplemental disclosures of cash flow information
Interest paid	$	2,250		$	3,526		$	2,014
Income taxes paid		2,271			933			503
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		3,837			2,017			(587	)
Initial right of use asset for leased properties		—			2,256			—
Initial lease liability for leased properties		—			2,308			—
Extension of right of use asset for leased properties		821			—			—
Extension of lease liability for leased properties		874			—			—
Loans transferred to foreclosed real estate		—			267			160
Company financed OREO		90			(70	)		—

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.

Congress, the President, the Federal Reserve, and other federal agencies have taken several actions designed to mitigate the economic fallout of the COVID-19 pandemic. Most notably, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act was, signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent or mitigate a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. As the ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. The Consolidated Appropriations Act, 2021, or CAA, was signed into law on December 27, 2020 and extends certain provisions under the CARES Act. It is possible that Congress will enact supplementary COVID-19 response legislation.

The Company continues to assess the impact of the CARES Act, CAA and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. While it is not possible to know the full extent of the damage to the U.S. and local economies that have been created by the impact of COVID-19, the following are certain areas that could be adversely impacted:

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

As outlined in the CARES Act, and encouraged through guidance by federal banking agencies, the Company is providing a payment deferral option for commercial and consumer loans adversely affected by the pandemic. In accordance with the CARES Act, these modifications are not required to be reported as troubled debt restructurings if (i) the loan modification is made between March 1, 2020 and December 31, 2020 and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The CAA extended the applicable period of the CARES Act, as related to troubled debt restructurings, to the earlier of January 1, 2022 or 60 days after the date the national emergency concerning COVID-19 terminates. The Company is initially providing up to a three-month deferral period or conversion to interest only repayment for up to three months to allow for re-evaluation in a timely manner based on the economic impact at that time. Additional extensions may be considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program.

The Paycheck Protection Program (“PPP”), which is administered by the U.S. Small Business Administration (“SBA”), was created as part of the CARES Act. The Company participated in assisting its customers with applications for funds through the program. PPP loans have a two-year term or, if approved after June 5, 2020, a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2020, the Company had funded 1,202 PPP loans representing $81 million. Of the loans funded, 23 loans totaling $4.5 million had been forgiven by the SBA as of December 31, 2020. The CAA established another round of PPP loan funding for certain eligible borrowers, and the Company will assist these borrowers in obtaining a first or second draw loan. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision expense charged to earnings.

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

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), Federal Family Education Loan Program (FFELP) student loan asset-backed securities, 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, other real estate construction loans and other loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction loans, real estate 1-4 family residential loans, home equity loans and consumer 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 non-accrual 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 non-accrual 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 net realizable 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 U.S. Small Business Administration (SBA) loan servicing rights when loans are sold and the loan servicing is retained. Servicing revenue is recognized in the statement of income as a component of other noninterest income. 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.

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

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

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. Right-of-use (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 these investments were 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, 2020 and December 31, 2019, 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 2017 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, 2020, 2019 and 2018.

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. 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.

For revenue not associated with financial instruments, loan servicing 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. Network costs associated with debit card and credit card transactions are netted against the related fees from such transactions. For the twelve months ended December 31, 2020, gross interchange and card transaction fees totaled $2.1 million while related network costs totaled $1.2 million. On a net basis, we reported $917,000 as interchange and card transaction fees in the accompanying Consolidated Statement of Income for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2019 and December 31, 2018, interchange and card transaction fees were $2.0 million and $1.7 million, respectively, on a gross basis while related network costs were $1.2 million and $1.1 million, respectively.

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

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

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

Prices for US Treasury and marketable equity securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the Level 1 input column. Prices for government agency securities, mortgage-backed securities, asset-backed securities and 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.

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

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

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

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

The 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, 2020, 2019 and 2018:

The Company had no stock options outstanding at December 31, 2020, 2019 and 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 October 20, 2020, the Company’s Board of Directors declared a 2% stock dividend payable on November 23, 2020 to shareholders of record on November 9, 2020. 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 in January 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.

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. During 2019, the effective date was extended to fiscal years beginning on or after December 15, 2022 for public entities that qualify as smaller reporting companies, per the Securities and Exchange Commission definition, which currently includes the Company. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We 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.

ASC 848, “Reference Rate Reform,” was set forth to eliminate certain reference rates and introduce new reference rates that are based on a larger, more liquid population of observable transactions that are less vulnerable to manipulation. The reference rate reform will discontinue the use of certain widely used reference rates such as the London Interbank Offered Rate, or LIBOR. In response to likely challenges arising from contract modifications due to reference rate reform, the FASB issued ASU 2020-04 in March 2020 to provide optional expedients and exceptions for applying GAAP to contract modifications. As such, modifications to debt contracts may be accounted for as a continuation of the existing contract by prospectively adjusting the effective interest rate. This amendment can be applied beginning March 12, 2020 and will sunset December 31, 2022. The Company currently holds loan contracts that reference LIBOR, and is evaluating the most effective manner in which to modify those contracts, but does not anticipate material financial impact.

The FASB issued ASU 2018-13 in August 2018 to improve the effectiveness of disclosures related to fair value measurements required under ASU 820. ASU 2018-13 amends the disclosure requirements for recurring and nonrecurring fair value measurements. Most notably, recurring fair value measurements categorized within Level 3 of the hierarchy must include a description of the uncertainty of the fair value measurement from the use of significant unobservable inputs, if those inputs could have been different at the reporting date. Additionally, for recurring Level 3 fair value measurements held at the end of the reporting period, changes in unrealized gains and losses for the period included in other comprehensive income must be disclosed. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements must also be disclosed. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. During 2020, the Company recorded mortgage banking derivatives, specifically IRLCs, which are measured at fair value on a recurring basis and reflected in Level 3 of the fair value hierarchy.

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 2019 and 2018 financial statements have been reclassified to conform to the 2020 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, 2020 and December 31, 2019, the Company owned Federal Reserve Bank stock reported at cost of $509,000. Also, at December 31, 2020 and December 31, 2019, the Company owned Federal Home Loan Bank (“FHLB”) stock of $657,000 and $635,000, 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, 2020.

Results from sales of securities available for sale for the years ended December 31, 2020, 2019 and 2018 are as follows:

At December 31, 2020 and 2019 securities available for sale with a carrying amount of $82.8 million and $65.3 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, 2020 and December 31, 2019. 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, 2020, the unrealized losses on available for sale securities less than twelve months related to four government agency bonds, three government sponsored enterprise (GSE) mortgage-backed securities, two asset-backed securities and ten state and political subdivision bonds. At December 31, 2019, the unrealized loss on available for sale securities less than twelve months related to three government agency bonds, six GSE mortgage-backed securities and one state and political subdivision bond. The Company had four government agency bonds and nine GSE mortgage-backed securities that had been in a loss position for more than twelve months at December 31, 2019. At December 31, 2019, the unrealized losses on held to maturity securities less than twelve months related to one corporate bond.

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

The following tables show contractual maturities of the investment portfolio as of December 31, 2020:

The composition of net loans held for investment by class as of December 31, 2020 and 2019 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 28.62% of total loans. Additionally, there is a concentration in commercial loans (not including PPP loans) secured primarily by real estate, shopping center locations, commercial land development, commercial buildings, equipment, and general commercial loans that represent 52.09% 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 non-accrual loans and other loans identified by management as impaired, totaled $8.2 million and $6.8 million at December 31, 2020 and 2019, respectively. There were no loans 90 days past due and still accruing at December 31, 2020 or at December 31, 2019.

Restructured loans at December 31, 2020 and December 31, 2019 totaled $4.4 million and $3.9 million, respectively, and are included in the impaired loan total. The carrying value of foreclosed properties held as other real estate was $0 and $494,000 at December 31, 2020 and 2019, respectively. The Company had $0 in foreclosed residential real estate and $51,000 of residential real estate in process of foreclosure at December 31, 2020. At December 31, 2019, the Company had $130,000 in foreclosed residential real estate and $387,000 of residential real estate in process of foreclosure.

The Company had loans of $193.1 million and $166.9 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2020 and 2019, 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 year ended December 31, 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of U.S. Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable in addition to the standard probable loss calculation performed on all non-impaired loans.

With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) loan category reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional qualitative factors allocated $132,000 to the reserve during the year that was not present at December 31, 2019.

In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 at the time of adoption.

Changes in the allowance for loan losses for the years ended December 31, 2020, 2019 and 2018 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, 2020 and 2019:

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, 2020	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	$	—	$	—	$	—	$	64,334	$	64,334	$	—
SBA Paycheck Protection Program (PPP)		—		—		—		74,750		74,750
Real estate - commercial		—		2,076		2,076		145,153		147,229		—
Other real estate construction		52		1,039		1,091		31,829		32,920		—
Real estate construction		—		—		—		7,709		7,709		—
Real estate - residential		299		595		894		74,119		75,013		—
Home equity		—		48		48		51,567		51,615		—
Consumer loan		46		—		46		11,027		11,073		—
Other loans		—		—		—		3,098		3,098		—
Total	$	397	$	3,758	$	4,155	$	463,586	$	467,741	$	—

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

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

Loans that are in non-accrual status or 90 days past due and still accruing are considered to be nonperforming. Nonperforming loans were $3.8 million at December 31, 2020 and $2.9 million at December 31, 2019.

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 non-accrual loans are graded as substandard.

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

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

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

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2020 and 2019:

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, 2020, 2019, and 2018:

	As of December 31, 2020								Year Ended December 31, 2020
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	651	$	—	$	651	$	20	$	425	$	27
SBA Paycheck Protection Program (PPP)		—		—		—		—		—		—
Real estate - commercial		3,547		2,076		1,471		33		3,581		111
Other real estate construction		1,039		1,039		—		—		886		—
Real estate 1 -4 family construction		—		—		—		—		—		—
Real estate - residential		2,856		1,416		1,440		84		3,095		146
Home equity		48		15		33		10		67		2
Consumer loans		13		—		13		—		18		1
Total	$	8,154	$	4,546	$	3,608	$	147	$	8,072	$	287

									Year Ended
	As of December 31, 2019								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

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

Loans modified as TDRs are typically already on non-accrual status and in some cases, partial 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, 2020, 2019 and 2018, the following table presents a breakdown of the types of concessions made by loan class:

	Year Ended December 31, 2020
			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	$	649	$	649
Real estate - commercial		1		829		829
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		4		486		486
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		6	$	1,964	$	1,964
Total		6	$	1,964	$	1,964

	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

During the twelve months ended December 31, 2020, there was one TDR for which there was a payment default. There was one payment default in 2019 and one payment default on a TDR in 2018. The outstanding balance of TDRs at December 31, 2020 was $4.4 million of which $46,000 was in non-accrual status. Comparatively, the outstanding balance at December 31, 2019 was $3.9 million of which $26,000 was in non-accrual status.

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 $137,000 in the allowance for loan loss as of December 31, 2020, as a direct result of these TDRs. At December 31, 2019 and 2018 there was $117,000 and $144,000 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, 2020, 2019 and 2018:

Effective March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020, allows the Company to suspend the TDR classifications described above in an effort to provide relief to borrowers impacted by COVID-19. The Consolidated Appropriations Act, 2021 (CAA), which was signed into law on December 27, 2020, extends the expiration of TDR suspensions as set forth in the CARES Act. The Company has elected to adopt this suspension until January 1, 2022 or 60 days after the national emergency terminates, per the CAA. Modifications of loans subsequent to March 1, 2020 for COVID-19 reasons, and that were current as of December 31, 2019, are not considered TDRs and are tracked internally as “COVID-19 Modifications”.

The Company initially provided up to a three-month deferral period or conversion to interest only repayment for up to three months. Additional extensions have been considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program. As of December 31, 2020, the Company had 3 current outstanding modified loans with a recorded investment of $4.4 million. All 3 loans under accommodation had entered payment deferral a second time. Additionally, 202 previously modified loans with outstanding balances totaling $52.0 million have come out of deferment. Of the loans removed from deferment, 18 with balances totaling $4.1 million were paid-off, 179 loans totaling $47.6 million were out of accommodation and current at December 31, 2020 and 5 loans totaling $385,000 were removed due to noncompliance.

As of December 31, 2020, the Company’s remaining modified loans for COVID-19 related reasons are disclosed in the table below:

	Interest only				Payment deferral				Other				Total COVID-19 modifications
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
December 31, 2020

Commercial		—	$	—		—	$	—		—	$	—		—	$	—
Real estate - commercial		1		4,224		1		126		—		—		2		4,350
Other real estate construction		—		—		—		—		—		—		—		—
Other loans		—		—		—		—		—		—		—		—
Real estate – residential		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Consumer loans		—		—		1		12		—		—		1		12
Total		1		4,224		2		138		—		—		3		4,362

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 $599.3 million and $419.4 million at December 31, 2020 and 2019, 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 loan servicing rights was $4.1 million and $3.2 million at December 31, 2020 and 2019, 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, 2020 and 2019 are listed below:

Depreciation expense was $1.1 million for the years ended December 31, 2020, 2019 and 2018, and is included in net occupancy expense.

Our leases relate to three office locations, two of which are branch locations, with remaining terms of five to nine years. Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of December 31, 2020, operating lease ROU assets were $2.4 million and the lease liability was $2.6 million. Operating lease ROU assets were $1.9 million and the lease liability was $2.0 million at December 31, 2019. The table below depicts information related to the Company’s leases:

Total rental expense related to the operating leases was $381,622, $371,327, and $339,782 for the years ended December 31, 2020, 2019 and 2018, respectively, and is included in net occupancy expense. A table detailing the lease payments 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 were accounted for under ASC 840, Leases. Total rental expense related to the operating leases was $339,782 for the year ended December 31, 2018, 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, 2020 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 2020 and 2019:

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 $56.7 million at December 31, 2020.

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 $90.7 million with remaining availability of $55.7 million at December 31, 2020. There were no long-term advances under this line at December 31, 2020 or at December 31, 2019. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A. during 2020. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of December 31, 2020, a balance of $1.0 million was outstanding on the line of credit. This loan carries certain debt covenants. As of December 31, 2020, the Company was in compliance with these covenants with the exception of the Bank’s leverage ratio due to our participation in SBA PPP loan funding. TIB is aware of this and has waived the covenant through December 31, 2020. 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 $35.0 million at December 31, 2020.

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, 2020. 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, 2020, the scheduled maturities of these long-term borrowings are as follows:

The significant components of income tax expense for the years ended December 31, 2020, 2019 and 2018 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, 2020, 2019 and 2018 are as follows:

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

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, 2020 and 2019, 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 in North Carolina. 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:

During 2020, the Company implemented new procedures to identify loans made to directors, executive officers and their related interests. In order to align the new identification process with the prior year method, a one-time adjustment to the December 31, 2020 beginning balance is reflected in the above table. At December 31, 2020, the Company had approved, but unused lines of credit, totaling $2.9 million to executive officers and directors, and their related interests, compared to $1.3 million at December 31, 2019. In addition, at December 31, 2020, the Company had $30.5 million of deposits for executive officers and directors, and their related interests compared to $12.7 million at December 31, 2019. Preferred stock issued to directors, executive officers and their related interests was $1.2 million at December 31, 2020 and 2019. Additionally, certain directors have been issued the subordinated debt of the Company. The amount of related interest in the Company’s subordinated debt in 2020 is $1.3 million compared to $1.1 million at December 31, 2019. In the ordinary course of business during 2020, the Bank purchased $227,000 of vehicles from a dealership that is considered a related party.

During 2017, the Company’s broker-dealer subsidiary (The Strategic Alliance Corporation) 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, 2020, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $0 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, 2020, 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, 2020
Total Capital to Risk
Weighted Assets:
Consolidated	$	59,237		11.7	%	$	40,675		8.0	%
Uwharrie Bank		65,844		13.1	%		40,272		8.0	%		50,340		10.0	%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated		55,077		10.8	%		30,506		6.0	%
Uwharrie Bank		61,442		12.2	%		30,204		6.0	%		40,272		8.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
Consolidated		44,422		8.7	%		22,880		4.5	%
Uwharrie Bank		50,787		10.1	%		22,653		4.5	%		32,721		6.5	%
Tier 1 Capital to
Average Assets:
Consolidated		55,077		6.9	%		32,033		4.0	%
Uwharrie Bank		61,442		7.7	%		31,828		4.0	%		39,785		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, 2019
Total Capital to Risk
Weighted Assets:
Consolidated	$	60,509		14.1	%	$	34,387		8.0	%
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	%
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	%
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	%
Uwharrie Bank		56,101		8.5	%		26,249		4.0	%		32,812		5.0	%

As of December 31, 2020, 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.

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.

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 2020, the Company repurchased 181,558 shares of outstanding common stock and repurchased 168,683 and 138,629 shares of outstanding common stock during 2019 and 2018, 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, 2020, both the SOP II plan and the SPP II plan had expired with no options outstanding.

As of December 31, 2020, 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 no options exercised in 2020 or 2019. There were 13,378 options exercised in 2018 at a weighted average exercise price of $4.93.

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 eligible service. Employees are 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $488,795 in 2020, $446,228 in 2019 and $428,162 in 2018, 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 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 the year of 2020, $238,300 was expensed for benefits provided under the plans. During 2019 and 2018, $336,800 was expensed for benefits provided under the plans. The liability accrued for deferred compensation under the plan amounted to $5.3 million and $4.7 million at December 31, 2020 and 2019, 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 2020, 2019, and 2018, the expense associated with these policies was $26,173, $13,107, and $1,846 respectively.

The liability associated with the split-dollar life insurance policies is $812,000 and $786,000 at December 31, 2020 and 2019, 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 2020 there were 23,256 shares granted at an expense of $124,000 compared to 14,400 shares granted at an expense of $72,000 in 2019 and 8,926 shares granted at an expense of $50,000 in 2018.

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, 2020 and December 31, 2019, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price 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, 2020 and December 31, 2019:

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

	Carrying		Estimated
December 31, 2020	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	88,868	$	88,879	$	87,623	$	1,256	$	—
Securities available for sale		191,513		191,513		—		191,513		—
Securities held to maturity		28,207		29,600		—		19,664		9,936
Equity securities		1,352		1,352		1,352		—		—
Loans held for investment, net		463,339		458,706		—		—		458,706
Loans held for sale		6,959		6,959		—		6,959		—
Restricted stock		1,166		1,166		1,166		—		—
Loan servicing rights		3,957		4,054		—		4,054		—
Mortgage interest rate lock commitments		2,073		2,073		—		—		2,073
Accrued interest receivable		2,523		2,523		—		—		2,523
FINANCIAL LIABILITIES
Deposits	$	743,196		743,378	$	—	$	743,378	$	—
Short-term borrowings		710		710		—		710		—
Long-term debt		10,992		10,909		—		—		10,909
Mortgage forward sales commitments		388		388		—		388		—
Accrued interest payable		21		21		—		—		21

	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

At December 31, 2020, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed. 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, 2020 and 2019:

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

The fair value of mortgage interest rate lock commitments is calculated based on a notional amount of $69 million. Significant unobservable inputs are used to determine the fair value of these derivatives. Such inputs include anticipated remaining costs associated with origination the loan of 0.83% and a projected pull-through rate of 86%. The estimated net margin to be earned from loan sales is also applied in the calculation. Changes in interest rates and other assumptions could significantly change these estimated values.

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

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, 2020 and December 31, 2019:

At December 31, 2020 and 2019, 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:

	2020			2019			2018
	(dollars in thousands)
Cash flows from operating activities
Net income	$	8,107		$	3,087		$	2,477
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(5,882	)		(1,206	)		(2,026	)
Unrealized gain on equity securities		(451	)		—			—
(Increase) decrease in other assets		120			(435	)		(198	)
Increase (decrease) in other liabilities		(182	)		528			220
Net cash provided by operating activities		1,712			1,974			473
Cash flows from investing activities
Purchase of equity securities		(901	)		—			—
Purchase of investments in other assets		(1,120	)		—			—
Net cash used by financing activities		(2,021	)		—			—
Cash flows from financing activities
Increase (decrease) in master notes		84			(564	)		(562	)
Increase (decrease) in long-term debt		1,000			(440	)		440
Net increase in subordinated debentures		—			458			—
Net increase in investment in subsidiares		—			—			(250	)
Net proceeds from issuance of common stock - stock options		—			—			65
Repurchase of common stock, net		(991	)		(850	)		(747	)
Cash paid for fractional shares		(7	)		(7	)		(7	)
Other, net		1			1			—
Net cash provided (used) by financing activities		87			(1,402	)		(1,061	)
Net increase (decrease) in cash and cash equivalents		(222	)		572			(588	)
Cash and cash equivalents at beginning of year		2,115			1,543			2,131
Cash and cash equivalents at end of year	$	1,893		$	2,115		$	1,543

The following consolidated selected financial data is derived from our audited financial statements as of and for the five years ended December 31, 2020. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this report.

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

	2020			2019			2018			2017			2016
Summary of Operations
Interest income	$	24,075		$	23,767		$	21,873		$	19,340		$	18,046
Interest expense		2,236			3,565			1,882			1,277			1,310
Net interest income		21,839			20,202			19,991			18,063			16,736
Provision for (recovery of) loan losses		2,387			(588	)		90			(236	)		(88	)
Noninterest income		20,877			9,005			8,279			8,425			9,357
Noninterest expense		29,885			25,937			25,124			23,304			23,075
Income taxes		2,337			771			579			1,809			895
Net income	$	8,107		$	3,087		$	2,477		$	1,611		$	2,211
Less: Net income attributable to noncontrolling interest		(567	)		(564	)		(570	)		(592	)		(593	)
Less: Dividends on preferred stock	$	—		$	—		$	—		$	—		$	—
Net Income available to common shareholders	$	7,540		$	2,523		$	1,907		$	1,019		$	1,618
Per Common Share
Net income – basic ⁽¹⁾	$	1.06		$	0.34		$	0.26		$	0.13		$	0.21
Net income – diluted ⁽¹⁾		1.06			0.34			0.26			0.13			0.21
Book value ⁽¹⁾		6.89			5.28			4.66			4.49			4.31
Weighted Average Shares
Outstanding:
Basic ⁽¹⁾		7,130,772			7,343,247			7,373,919			7,575,577			7,681,987
Diluted ⁽¹⁾		7,130,772			7,343,247			7,373,919			7,576,360			7,682,100
Ratios
Return on average assets		1.10	%		0.48	%		0.40	%		0.28	%		0.41	%
Return on average equity		15.37	%		6.43	%		5.57	%		3.62	%		4.99	%
Average equity to average assets		7.14	%		7.43	%		7.26	%		7.78	%		8.29	%
Selected Year-end Balances
Assets	$	827,770		$	656,793		$	632,304		$	577,253		$	548,230
Loans held for investment		467,741			357,950			369,970			356,871			341,829
Securities		221,072			101,952			102,136			107,201			117,889
Deposits		743,196			585,878			566,901			512,628			485,719
Borrowed funds		11,702			10,618			11,164			11,286			12,208
Shareholders’ equity		59,237			48,858			45,175			44,540			43,525
Selected Average Balances
Assets	$	738,060		$	645,681		$	612,403		$	572,630		$	534,296
Loans held for investment		431,235			369,540			369,419			348,980			334,317
Securities		158,017			100,775			103,223			113,025			107,396
Deposits		663,188			575,480			548,296			509,352			470,921
Borrowed funds		11,380			10,956			11,284			11,679			12,898
Shareholders’ equity		52,732			47,993			44,468			44,542			44,283

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 8-52 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: the impact of the novel Coronavirus disease, or COVID-19, on our borrowers’ ability to meet their financial obligations to us; increases in our past due loans and provisions for loan losses that may result from COVID-19; declines in general economic conditions, including increased stress in the financial markets due to COVID-19; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

The Company’s total assets increased $171.0 million from $656.8 million at December 31, 2019 to $827.8 million at December 31, 2020. The primary driver of this growth was an increase in customer deposits held by the bank. These deposits were used to fund a $117.8 million increase in investments securities and a $111.4 million increase in the net loan portfolio.

These aforementioned increases were offset by a decrease in cash and cash equivalents of $66.3 million.

Investment securities consist of securities available for sale and securities held to maturity. Total investment securities increased $117.8 million, or 115.5%, from $102.0 million at December 31, 2019 to $219.7 million at December 31, 2020, due to investments of cash into longer-term, higher yielding assets. At December 31, 2020, the Company had net unrealized gains on securities available for sale of $5.4 million, compared to net unrealized gains of $419,000 at December 31, 2019. The significant improvement is directly related to the increase in volume and the decline of the bond yields at December 31, 2020 compared to December 31, 2019, as the market reacted to the COVID-19 outbreak worldwide.

An additional investment of $901,000 was made into an equity security during 2020. The value of the equity security increased $451,000 by the end of the year, resulting in a fair value of $1.4 million for the security at December 31, 2020.

Loans held for investment increased $109.8 million from $358.0 million at December 31, 2019 to $467.7 million at December 31, 2020. The Company experienced net growth in nearly all sectors with the largest increase (not including PPP loans) occurring in the commercial real estate segment. During the second and third quarter of 2020, the Company funded 1,202 SBA PPP loans for a total of $81.0 million. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. Payoffs and SBA forgiveness payments totaling $4.6 million were received during the fourth quarter leaving an unpaid principal balance on SBA PPP loans of $76.4 million at December 31, 2020. Loans held for sale increased 173.4%, or $4.0 million, as many of the loans produced near the December 31, 2020 year-end date were not sold on the secondary market until early January and February. The increase in re-finance activity due to a favorable interest rate environment for borrowers has increased production for the mortgage division of the Company.

The allowance for loan loss was $4.4 million at December 31, 2020, which represents 0.94% of the total loans held for investment, an increase from 0.55% at December 31, 2019. Additional discussion regarding the increase in the allowance is included in the Asset Quality section below.

Other changes in our consolidated assets are primarily related to prepaid assets, other assets and loan servicing assets. Prepaid assets have increased $431,000 from December 31, 2019 to December 31, 2020, due to software maintenance contracts for various new technology investments in 2020. Other assets increased $4.1 million during 2020, primarily due to the reflection of $2.1 million in fair value of mortgage commitments and a $1.1 million investment in a community development project. Loan servicing assets increased by $2.2 million during the year as a result of the aforementioned production growth within the Company’s mortgage division. 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 (Significant Accounting Policies) to the Company’s Notes to Consolidated Financial Statements). The value of this asset was $1.9 million at December 31, 2019. In December of 2020, the Company exercised an option to extend on one of the operating leases by five years resulting in a one-time increase of $821,000 to the ROU asset. At December 31, 2020, the ROU asset was $2.4 million. Throughout 2020, other real estate owned declined $494,000 to $0 at December 31, 2020 as the Company sold all of the foreclosed property held at December 31, 2019. During 2020, the Company sold five pieces of foreclosed property realizing a gain of $24,000.

Customer deposits, our primary funding source, experienced a $157.3 million increase during the year, increasing from $585.9 million to $743.2 million at December 31, 2020, a 26.9% increase. A portion of this increase is related to funding of SBA PPP loans, some of the proceeds of which were deposited by our customers into their deposit accounts held at the Company’s subsidiary bank. Demand noninterest-bearing checking accounts increased $55.5 million and savings deposits increased $17.7 million. Interest checking and money market accounts increased by $118.4 million, of which $41.0 million is related to an account that moved from time deposits greater than $250,000 due to maturity. Other time deposits decreased $34.2 million during the twelve-month period ended December 31, 2020. In general, the Company has seen an increase in average account balances of 20-30% during the year, driven by economic uncertainty and government stimulus support.

During 2020 the Company’s net borrowings increased by $1.1 million. 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, 2020 and 2019, there were no advances outstanding. The components of total borrowings include $710,000 in master notes, $1.0 million in use on a $3.0 million line of credit and $10.0 million in junior subordinated long-term debt at December 31, 2020. The subordinated debt securities have a final maturity date of September 30, 2029, though may be redeemed by the Company on or after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%.

Other liabilities increased from $11.4 million at December 31, 2019 to $13.6 million at December 31, 2020, an increase of $2.2 million, largely due to the extension of an operating lease which increased lease liability by $547,000 year over year. The valuation of mortgage forward commitments also increased other liabilities by $388,000.

At December 31, 2020, total shareholders’ equity was $59.2 million, an increase of $10.4 million from December 31, 2019. Net income for the period was $8.1 million. Unrealized gains on investment securities net of tax increased $3.8 million. The Company repurchased 181,558 outstanding shares of common stock at an aggregate repurchase price of $991,000. The Company also paid $567,000 in dividends attributed to noncontrolling interest. See Note 1 (Significant Accounting Policies) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest. At December 31, 2020, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Uwharrie Capital Corp reported net income of $8.1 million for the twelve months ended December 31, 2020, as compared to $3.1 million for the twelve months ended December 31, 2019, an increase of $5.0 million. Net income available to common shareholders was $7.5 million or $1.06 per common share for the year ended December 31, 2020, compared to net income available to common shareholders of $2.5 million or $0.34 per common share for the year ended December 31, 2019. 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 $1.6 million to a total of $21.8 million for the twelve months ended December 31, 2020 from the $20.2 million earned in the same period of 2019. During 2020, growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $3.9 million. The average yield on our interest-earning assets decreased 46 basis points to 3.50%, while

the average rate paid for interest-bearing liabilities decreased 35 basis points. These decreases resulted in a net decrease of 11 basis points in our interest rate spread, from 3.15% in 2019 to 3.04% in 2020. Our net interest margin for 2020 was 3.18%, compared to 3.37% in 2019. 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 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. Financial Table 1 and Table 2, as well other Financial Tables referenced in this discussion and analysis, appear at the end of this annual report, immediately preceding the identification of the Company’s board of directors and executive officers.

The provision for (recovery of) loan losses was $2.4 million and ($588,000) for the twelve months ended December 31, 2020 and 2019, respectively. There were net loan recoveries of $34,000 for the twelve months ended December 31, 2020 as compared to net loan recoveries of $281,000 during the same period of 2019. Refer to the Asset Quality section 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 131.8%, from $9.0 million in 2019, to $20.9 million in 2020, an increase of $11.9 million. The driving factor contributing to this growth was an increase in income from mortgage loan sales of $10.9 million to $14.7 million for 2020 compared to $3.8 million during 2019. This increase is due to stronger margins and increased production from refinance transactions as long-term rates fell during the first quarter and remained historically low through the fourth quarter of 2020. In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $451,000, which is reported in noninterest income.

Noninterest expense for the year ended December 31, 2020 was $29.9 million compared to $25.9 million for 2019, an increase of $4.0 million. Salaries and employee benefits, the largest component of noninterest expense, increased $2.8 million, from $17.1 million for the period ending December 31, 2019 to $19.9 million for 2020. Wage and benefit cost increases as well as increased commissions for production growth in the mortgage division contributed to this increase. As a result of production growth in the mortgage division, loan costs increased by $224,000 to $583,000 at December 31, 2020. Costs associated with software and technology updates increased by $338,000 from December 31, 2019 to December 31, 2020. Foreclosed real estate expense, another major component of the change in noninterest expense, decreased $288,000, from $300,000 in 2019 to $12,000 during 2020. This decrease was made possible as smaller write downs were realized, and all of the foreclosed property was sold during 2020. Additionally, data processing costs experienced a decrease totaling $37,000 for the comparable twelve-month period. Financial Table 5 reflects the additional breakdown of other noninterest expense.

The Company had income tax expense of $2.3 million for 2020 at an effective tax rate of 22.38% compared to income tax expense of $771,000 in 2019 with an effective tax rate of 19.98%. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance. The effective tax rate for 2020 increased compared to 2019 due to an additional tax accrual related to a supplemental executive retirement plan (SERP) distribution.

Results of operations for the Years Ended December 31, 2019 and 2018 can be found in the 2019 10-K Annual Report filing.

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

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

During the second quarter of 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of U.S. Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable, in addition to the standard probable loss calculation performed on all non-impaired loans. With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional reserves allocated $132,000 to the reserve during 2020 that was not present at December 31, 2019. In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 at the time of adoption.

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

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

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

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Unexpected global events, such as the unprecedented economic disruption due to COVID-19, are the type of future events that often cause material adjustments to the allowance to be necessary. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

At December 31, 2020, the levels of our impaired loans, which includes all loans in non-accrual status, TDRs, and other loans deemed by management to be impaired, were $8.2 million, compared to $6.8 million at December 31, 2019, a net increase of $1.3 million. The increase is related to one large relationship moving into non-accrual status during the first quarter of 2020 and one large relationship being modified as a TDR in the second quarter of 2020. Total non-accrual loans, which are a component of impaired loans, increased from $2.9 million at December 31, 2019 to $3.8 million at December 31, 2020. During 2020, five additional loans totaling $2.0 million were added to impaired loans; however, eight loans totaling $376,000 were closed. That was offset by net pay downs of $297,000.

The allowance, expressed as a percentage of gross loans held for investment, increased thirty-nine basis points from 0.55% at December 31, 2019 to 0.94% at December 31, 2020. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.52% at December 31, 2019 and 0.93% at December 31, 2020. The increase is attributable to the model adjustments discussed above allowing additional economic factors to increase qualitative factors related to the worldwide COVID-19 outbreak. This outbreak, which resulted in many businesses closing and staff layoffs, led management to increase the allowance allocated based on economic outlook in the model to the largest allowable based on internal policy. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 2.06% to 1.81% for the same periods, mainly due to the two large relationships totaling $1.7 million that were deemed impaired during 2020, though little reserve is recognized based on the net realizable value.

The ratio of nonperforming loans, which consists of non-accrual loans and loans past due 90 days and still accruing, to total loans decreased slightly from 0.82% at December 31, 2019, to 0.80% at December 31, 2020.

As of December 31, 2020, management believed the level of the allowance for loan losses was appropriate in light of the risk inherent in the loan portfolio.

Other real estate owned decreased from $494,000 at December 31, 2019 to $0 at December 31, 2020. The Company sold all five pieces of foreclosed property held at December 31, 2019, realizing a gain of $24,000. The Company had $21,000 in write-downs during 2020, and there were no loans foreclosed on during the year.

Troubled debt restructured loans at December 31, 2020 totaled $4.4 million compared to $3.9 million at December 31, 2019 and are included in impaired loans. The increase is related to one relationship of $650,000 that was added during the second quarter of 2020. At December 31, 2020, there was one troubled debt restructured loan in non-accrual status, which had a balance of $46,000.

As discussed in Note 5 (Troubled Debt Restructures) of our Notes to Consolidated Financial Statements, the CARES Act allows for loan modifications related to COVID-19 impacts to be excluded from TDR status. As of December 31, 2020, the Company had three current outstanding loan portfolio modifications of COVID-19 impacted loans with a recorded investment of $4.4 million. All three of the loans currently under accommodation had entered payment deferral a second time. Additionally, 202 previously modified loans with outstanding balances totaling $52.0 million have come out of deferment. Of the loans removed from deferment, 18 with balances totaling $4.1 million were paid-off, 179 loans totaling $47.6 million were out of accommodation and current at December 31, 2020 and 5 loans totaling $385,000 were removed due to noncompliance.

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

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, 2020, 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 the 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.

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. These debt 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 the Company’s 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 at the Company level. The Company will have a twenty percent reduction beginning at September 30, 2024.

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 bank’s capital ratios.

The Board of Directors of Uwharrie Capital Corp declared a 2% stock dividend in each of 2020, 2019, and 2018. 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 2020 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 $28.7 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, 2020, short-term borrowings amounted to $710,000. Long-term debt at that date consisted of $1.0 million outstanding on a line of credit and 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, 2020.

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.

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.

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 (6.42%) on Net Interest Income (Margin) in rates down scenario and a positive impact of 8.91% 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.

	2020							2019							2018
			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	$	130,640		2,570		1.97	%	$	84,206		1,680		2.00	%	$	88,328		1,497		1.69	%
Non-taxable securities ⁽¹⁾		26,427		732		3.57	%		16,569		408		3.08	%		17,580		434		3.05	%
Short-term investments		103,167		639		0.62	%		130,985		2,702		2.06	%		93,566		1,737		1.86	%
Equity Securities		950		51		5.37	%		—		—		0.00	%		—		—		0.00	%
Taxable loans ⁽²⁾		424,768		19,812		4.66	%		362,728		18,727		5.16	%		362,002		17,954		4.96	%
Non-taxable loans ⁽¹⁾		9,756		270		3.57	%		9,523		250		3.28	%		10,128		251		3.06	%
Total interest-earning assets		695,708		24,074		3.50	%		604,011		23,767		3.96	%		571,604		21,873		3.85	%
Non-earning assets
Cash and due from banks		3,718							2,695							5,905
Premises and equipment, net		16,766							16,740							15,037
Interest receivable and other		21,868							22,235							19,857
Total non-earning assets		42,352							41,670							40,799
Total assets	$	738,060						$	645,681						$	612,403
Interest-bearing liabilities
Savings deposits	$	65,671	$	62		0.09	%	$	56,589	$	102		0.18	%	$	52,484	$	91		0.17	%
Interest checking & MMDA		331,809		716		0.22	%		271,496		1,435		0.53	%		304,997		948		0.31	%
Time deposits		78,447		897		1.14	%		101,717		1,450		1.43	%		59,260		273		0.46	%
Total deposits		475,927		1,675		0.35	%		429,802		2,987		0.69	%		416,741		1,312		0.31	%
Short-term borrowed funds		534		2		0.37	%		905		15		1.66	%		1,641		16		0.98	%
Long-term debt		10,846		559		5.15	%		10,051		563		5.60	%		9,643		554		5.75	%
Total interest-bearing liabilities		487,307		2,236		0.46	%		440,758		3,565		0.81	%		428,025		1,882		0.44	%
Noninterest liabilities
Transaction deposits		187,261							145,678							131,556
Interest payable and other		10,760							11,252							8,354
Total liabilities		685,328							597,688							567,935
Shareholders’ equity		52,732							47,993							44,468
Total liabilities and shareholders' equity	$	738,060						$	645,681						$	612,403
Interest rate spread						3.04	%						3.15	%						3.41	%
Net interest income and net interest margin			$	21,838		3.18	%			$	20,202		3.37	%			$	19,991		3.53	%

	2020 Versus 2019									2019 Versus 2018
							Net									Net
(dollars in thousands)	Volume			Rate			Change			Volume			Rate			Change
Interest-earning assets
Taxable securities	$	920		$	(30	)	$	890		$	(76	)	$	259		$	183
Non-taxable securities		258			66			324			(25	)		(1	)		(26	)
Short-term investments		(373	)		(1,690	)		(2,063	)		733			232			965
Equity securities		26			25			51			—			—			—
Taxable loans		3,048			(1,963	)		1,085			37			736			773
Non-taxable loans		6			14			20			(15	)		14			(1	)
Total interest-earning assets		3,885			(3,578	)		307			654			1,240			1,894
Interest-bearing liabilities
Savings deposits		12			(52	)		(40	)		7			4			11
Transaction and MMDA deposits		224			(943	)		(719	)		(141	)		628			487
Other time deposits		(299	)		(254	)		(553	)		400			777			1,177
Short-term borrowed funds		(4	)		(9	)		(13	)		(10	)		9			(1	)
Long-term debt		43			(47	)		(4	)		23			(14	)		9
Total interest-bearing liabilities		(24	)		(1,305	)		(1,329	)		279			1,404			1,683
Net interest income	$	3,909		$	(2,273	)	$	1,636		$	375		$	(164	)	$	211

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, 2020							December 31, 2019							December 31, 2018
			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	%
		—		—		—			—		—		2.66	%		4,944		4,955		2.66	%
U.S. Government agencies
Due within twelve months		14,978		15,127		1.49	%		—		—		—			17,504		17,398		1.24	%
Due after one but within five years		4,005		4,120		1.80	%		18,958		18,945		1.55	%		25,093		24,398		1.63	%
Due after five but within ten years		10,272		10,513		1.72	%		6,911		6,741		1.94	%		6,626		6,399		1.78	%
Due after ten years		7,548		7,629		1.33	%		—		—		—			3,712		3,721		2.65	%
		36,803		37,389		1.55	%		25,869		25,686		1.66	%		52,935		51,916		1.59	%
Mortgage-backed securities
Due within twelve months		88		88		2.27	%		—		—		—			—		—		—
Due after one but within five years		256		266		3.15	%		7,137		7,123		1.95	%		1,557		1,544		2.57	%
Due after five but within ten years		16,685		18,258		2.41	%		16,685		17,059		2.62	%		7,815		7,587		2.06	%
Due after ten years		22,692		22,884		1.03	%		14,483		14,394		2.37	%		7,845		7,571		2.09	%
		39,721		41,496		1.62	%		38,305		38,576		2.40	%		17,217		16,702		2.12	%
Asset-backed securities
Due after ten years		38,536		39,281		1.28	%		—		—		—			—		—		—
		38,536		39,281		1.28	%		—		—		—			—		—		—
State and political
Due within twelve months		709		713		2.15	%		—		—		—			1,010		1,014		3.25	%
Due after one but within five years		725		727		5.40	%		1,334		1,336		3.64	%		1,079		1,064		3.23	%
Due after five but within ten years		2,755		2,825		2.14	%		1,398		1,423		2.74	%		1,688		1,646		3.13	%
Due after ten years		62,959		64,899		2.44	%		11,205		11,462		3.02	%		9,596		9,231		3.10	%
		67,148		69,164		2.45	%		13,937		14,221		3.05	%		13,373		12,955		3.12	%
Corporate Bonds
Due within twelve months		—		—		—			2,808		2,815		2.51	%		—		—		—
Due after one but within five years		3,902		4,183		3.20	%		2,210		2,214		2.75	%		5,030		4,771		2.94	%
		3,902		4,183		3.20	%		5,018		5,029		2.62	%		5,030		4,771		2.94	%
Total Securities available for sale
Due within twelve months		15,775		15,928		1.52	%		7,784		7,827		2.61	%		18,514		18,412		1.35	%
Due after one but within five years		8,888		9,296		2.75	%		29,639		29,618		1.83	%		37,703		36,732		2.02	%
Due after five but within ten years		29,712		31,596		2.14	%		24,994		25,223		2.44	%		16,129		15,632		2.06	%
Due after ten years		131,735		134,693		1.79	%		25,688		25,856		2.65	%		21,153		20,523		2.65	%
	$	186,110	$	191,513		1.87	%	$	88,105	$	88,524		2.31	%	$	93,499	$	91,299		2.04	%

	December 31, 2020							December 31, 2019							December 31, 2018
			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	$	459	$	470		2.89	%	$	578	$	583		2.69	%	$	—	$	—		—
Due after five but within ten years		—		—		—			—		—		—			855		843		2.42	%
		459		470		2.89	%		578		583		2.69	%		855		843		2.42	%
State and political
Due within twelve months		1,373		1,385		2.06	%		1,501		1,502		1.87	%		—		—		—
Due after one but within five years		2,882		2,968		2.70	%		4,397		4,457		2.40	%		5,545		5,493		2.21	%
Due after five but within ten years		—		—		—			928		929		2.15	%		1,332		1,329		2.42	%
Due after ten years		13,493		14,777		3.45	%		—		—		—			—		—		—
		17,748		19,130		3.22	%		6,826		6,888		2.25	%		6,877		6,822		2.25	%
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	%
Due after five but within ten years		10,000		10,000		5.01	%		3,000		3,000		5.50	%		—		—		—
		10,000		10,000		5.01	%		6,024		6,028		4.13	%		3,105		3,085		2.76	%
Total Securities held to maturity
Due within twelve months		1,373		1,385		2.06	%		4,525		4,530		2.46	%		1,543		1,534		2.73	%
Due after one but within five years		3,341		3,438		2.73	%		4,975		5,040		2.43	%		7,107		7,044		2.34	%
Due after five but within ten years		10,000		10,000		5.01	%		3,928		3,929		4.71	%		2,187		2,172		2.42	%
Due after ten years		13,493		14,777		3.45	%		—		—					—		—
	$	28,207	$	29,600		3.85	%	$	13,428	$	13,499		3.11	%	$	10,837	$	10,750		2.41	%

	At December 31,
	2020						2019						2018
				% of Total						% of Total						% of Total
(dollars in thousands)	Amount			Loans			Amount			Loans			Amount			Loans
Loan type:
Commercial	$	64,334			13.71	%	$	59,075			16.49	%	$	57,176			15.45	%
SBA Paycheck Protection Program (PPP)		76,398			16.28	%		—			—			—			—
Real estate - construction		40,629			8.66	%		30,643			8.55	%		38,946			10.52	%
Real estate - residential		126,615			26.98	%		122,586			34.22	%		129,105			34.88	%
Real estate - commercial		147,229			31.37	%		130,998			36.57	%		130,634			35.29	%
Consumer		11,073			2.36	%		12,957			3.62	%		12,159			3.29	%
Other		3,098			0.66	%		1,939			0.54	%		2,110			0.57	%
Total loans		469,376			100.00	%		358,198			100.00	%		370,130			100.00	%
Less:
Allowance for loan losses		(4,402	)					(1,981	)					(2,374	)
Unearned net loan (fees) costs		(1,635	)					(248	)					(160	)
Net loans	$	463,339					$	355,969					$	367,596

	At or for the Year Ended December 31,
(dollars in thousands)	2020			2019			2018			2017			2016
Allowance for loan losses at beginning of year	$	1,981		$	2,374		$	2,458		$	2,707		$	2,884
Provision for (recovery of) loan losses		2,387			(588	)		90			(236	)		(88	)
Other		—			(86	)		—			—			—
Loan charge-offs:
Commercial		76			10			89			16			76
Real estate		7			2			158			107			172
Consumer		51			148			79			85			142
Total charge-offs		134			160			326			208			390
Recoveries of loans previously charged off:
Commercial		73			14			28			75			19
Real estate		44			379			100			82			209
Consumer		51			48			24			38			73
Total recoveries		168			441			152			195			301
Net charge-offs (recoveries)		(34	)		(281	)		174			13			89
Allowance for loan losses at end of year	$	4,402		$	1,981		$	2,374		$	2,458		$	2,707
Net charge-offs (recoveries) as a percent of average loans		(0.01	)%		(0.08	)%		0.05	%		0.00	%		0.03	%

	2020					2019					2018
(dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate
At year-end
Master notes and other secured borrowings		710		0.22	%		626		0.89	%		1,190		1.49	%
Notes payable		—		0.00	%		—		0.00	%		—		0.00	%
Short-term line of credit		—		0.00	%		—		0.00	%		—		0.00	%
	$	710		0.22	%	$	626		0.89	%	$	1,190		0.50	%
Average for the year
Federal funds purchase	$	2		0.75	%	$	2		3.04	%	$	2		2.92	%
Master notes and other secured borrowings		532		0.41	%		904		1.61	%		1,638		1.00	%
Notes payable		—		0.00	%		—		0.00	%		—		0.00	%
Short-term line of credit		—		0.00	%		—		0.00	%		—		0.00	%
Short-term advances from FHLB		—		0.00	%		—		0.00	%		—		0.00	%
	$	534		0.42	%	$	906		1.62	%	$	1,640		1.00	%
Maximum month-end balance
Master notes and other secured borrowings		710					1,486					2,006
Notes payable		—					—					—
Short-term line of credit		—					—					—
Short-term advances from FHLB		—					—					—

	2020			2019
Weighted average remaining life	281 months			261 months
Weighted average discount rate		12	%		12	%
Weighted average coupon		3.54	%		4.04	%
Weighted average prepayment speed		287	%		182	%

	2020		2019
	(dollars in thousands)
Land	$	3,155	$	3,192
Building and improvements		14,303		15,783
ROU assets		2,437		1,945
Furniture and equipment		9,221		8,518
Total fixed assets		29,116		29,438
Less accumulated depreciation		12,134		12,376
Net fixed assets	$	16,982	$	17,062

	Twelve Months Ended December 31,
	2020			2019
	(in thousands except percent and period data)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	382		$	357
ROU assets obtained in exchange for new operating lease liabilities		2,437			1,945
Weighted-average remaining lease term - operating leases, in years		6.9			7.6
Weighted-average discount rate - operating leases		2.4	%		2.9	%

	Year ended December 31,
	2020			2019			2018
	(dollars in thousands)
Beginning Balance	$	323		$	(1,694	)	$	(1,107	)
Accumulated Other comprehensive income (loss) before reclassifications, net of ($1,163), ($595) and $171 tax effect, respectively		3,892			1,989			(587	)
Amounts reclassified from accumulated other comprehensive income, net of $16, ($7), and $0 tax effect, respectively (included in noninterest income)		(55	)		28			—
Net current-period other comprehensive income (loss)		3,837			2,017			(587	)
Ending Balance	$	4,160		$	323		$	(1,694	)

December 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Government agencies		36,804		611		26		37,389
GSE - Mortgage-backed securities and CMOs		39,720		1,844		68		41,496
Asset-backed securities		38,536		748		3		39,281
State and political subdivisions		67,148		2,107		91		69,164
Corporate bonds		3,902		281		—		4,183
Total securities available for sale	$	186,110	$	5,591	$	188	$	191,513

December 31, 2020	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. Government agencies		5,061		26		—		—		5,061		26
GSE-Mortgage-backed securities and CMOs		10,263		68		—		—		10,263		68
Asset-backed securities		2,686		3		—		—		2,686		3
State and political		11,286		91		—		—		11,286		91
Total securities available for sale	$	29,296	$	188	$	—	$	—	$	29,296	$	188

	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Securities available for sale
Due within twelve months	$	15,775	$	15,928
Due after one but within five years		8,888		9,296
Due after five but within ten years		29,712		31,596
Due after ten years		131,735		134,693
	$	186,110	$	191,513

Non-Commercial	2020			2019			2018
	(dollars in thousands)
Balance, beginning of year	$	894		$	1,040		$	1,057
Provision (recovery) charged to operations		734			(17	)		(42	)
Charge-offs		(53	)		(149	)		(81	)
Recoveries		74			74			106
Net (charge-offs) recoveries		21			(75	)		25
Other		—			(54	)		—
Balance, end of year	$	1,649		$	894		$	1,040

December 31, 2020	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	53	$	5,237	$	2,700	$	317,094	$	2,753	$	322,331
Non-Commercial		94		2,917		1,555		142,493		1,649		145,410
Total	$	147	$	8,154	$	4,255	$	459,587	$	4,402	$	467,741

December 31, 2020	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	61,828	$	2,321	$	185	$	—	$	64,334
SBA Paycheck Protection Program (PPP)		74,750		—		—		—		74,750
Real estate - commercial		143,222		1,113		2,894		—		147,229
Other real estate construction		31,263		344		1,313		—		32,920
Real estate 1 - 4 family construction		7,709		—		—		—		7,709
Real estate - residential		72,085		2,145		783		—		75,013
Home equity		50,661		661		293		—		51,615
Consumer loans		11,001		19		53		—		11,073
Other loans		3,098		—		—		—		3,098
Total	$	455,617	$	6,603	$	5,521	$	—	$	467,741

December 31, 2020	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	64,334	$	—	$	64,334
SBA Paycheck Protection Program (PPP)		74,750		—		74,750
Real estate - commercial		145,153		2,076		147,229
Other real estate construction		31,881		1,039		32,920
Real estate 1 – 4 family construction		7,709		—		7,709
Real estate – residential		74,418		595		75,013
Home equity		51,567		48		51,615
Consumer loans		11,073		—		11,073
Other loans		3,098		—		3,098
Total	$	463,983	$	3,758	$	467,741

	Paid In Full				Paying as restructured				Converted to non-accrual				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, 2020
Below market interest rate		—	$	—		1	$	219		—	$	—		—	$	—
Extended payment terms		—		—		—		—		—		—		—		—
Other		5		374		5		1,745		—		—		1		41
Total		5	$	374		6	$	1,964		—	$	—		1	$	41

Year ending December 31,
(dollars in thousands)
2021	$	933
2022		809
2023		684
2024		558
2025		432
Thereafter		541
Total	$	3,957

December 31,
(dollars in thousands)
2021	$	390
2022		400
2023		408
2024		417
2025		428
Thereafter		752
Total lease payments		2,795
Less: Interest		(236	)
Present value of lease liabilities	$	2,559

	Time Deposits		Other
Year ending December 31,	$250,000 and Over		Time Deposits
	(dollars in thousands)
2021		27,886		42,497
2022		939		4,896
2023		—		1,768
2024		—		872
2025		—		2,256
Thereafter		—		—
Total	$	28,825	$	52,289

	December 31, 2020
	(dollars in thousands)
	Mortgage interest rate lock commitments		Total
Balance at December 31, 2019		—		—
Change in fair value:
Included in income from mortgage banking		2,073		2,073
Balance at December 31, 2020		2,073		2,073

			General
December 31, 2020	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%

Nonperforming Assets
(dollars in thousands)
	At December 31,
	2020			2019			2018			2017			2016
Nonperforming Assets:
Accruing loans past due 90 days or more	$	—		$	—		$	—		$	—		$	—
Non-accrual loans		3,758			2,922			1,044			1,025			1,450
Other real estate owned		—			494			1,047			2,349			4,176
Total nonperforming assets	$	3,758		$	3,416		$	2,091		$	3,374		$	5,626
Allowance for loan losses	$	4,402		$	1,981		$	2,374		$	2,458		$	2,707
Nonperforming loans to total loans		0.80	%		0.82	%		0.28	%		0.29	%		0.42	%
Allowance for loan losses to total loans		0.94	%		0.55	%		0.65	%		0.69	%		0.79	%
Nonperforming assets to total assets		0.45	%		0.52	%		0.33	%		0.58	%		1.03	%
Allowance for loan losses to nonperforming loans		117.14	%		67.80	%		227.38	%		239.80	%		186.69	%

	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	$	710	$	710	$	—	$	—	$	—
Long-term debt		10,992		—		1,000		—		9,992
Operating leases		2,795		390		808		845		752
Total contractual cash obligations, excluding deposits		14,497		1,100		1,808		845		10,744
Deposits		743,196		729,949		7,830		3,489		1,928
Total contractual cash obligations, including deposits	$	757,693	$	731,049	$	9,638	$	4,334	$	12,672

	December 31, 2020
	One Year		One to		Over Five
(dollars in thousands)	or Less		Five Years		Years		Total
Commercial and agricultural	$	9,405	$	90,606	$	40,721	$	140,732
Real estate – construction		12,946		6,768		20,915		40,629
Total selected loans	$	22,351	$	97,374	$	61,636	$	181,361
Fixed rate loans	$	6,356	$	100,456	$	60,663	$	167,475
Sensitivity to rate changes:
Variable interest rates	$	24,960	$	19,527	$	255,779	$	300,266

	December 31, 2020
			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	$	19,021	$	1,406	$	7,459	$	939	$	28,825
Other Time Deposits		18,175		12,707		11,615		9,792		52,289
	$	37,196	$	14,113	$	19,074	$	10,731	$	81,114

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

Executive Officers
Roger L. Dick	Jason R. Andrew	Jeffrey L. Trout
President and Chief Executive Officer	Chief Information Officer	President
Uwharrie Capital Corp;	Uwharrie Capital Corp and	Uwharrie Bank Mortgage
Chief Executive Officer	Uwharrie Bank
Uwharrie Bank

R. David Beaver, III	Christy D. Stoner
Chief Financial Officer and	President and Chief Executive Officer
Chief Risk Officer	Uwharrie Investment Advisors, Inc.;
Uwharrie Capital Corp;	Chief Marketing Officer
President and Chief Financial Officer	Uwharrie Capital Corp and
Uwharrie Bank	Uwharrie Bank