(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: ~~6,984,582~~6,970,141 shares of common stock outstanding as of ~~April 30,~~July 31, 2020.

	March 31, 2020 (Unaudited)			December 31, 2019*			June 30, 2020 (Unaudited)			December 31, 2019*
	(dollars in thousands)						(dollars in thousands)
ASSETS
Cash and due from banks	$	6,364		$	7,520		$	5,922		$	7,520
Interest-earning deposits with banks		132,644			147,678			106,010			147,678
Cash and cash equivalents								111,932			155,198
Securities available for sale, at fair value		108,204			88,524			110,593			88,524
Securities held to maturity, at amortized cost (fair value $15,864 and $13,499, respectively)		15,798			13,428
Securities held to maturity, at amortized cost (fair value $28,357 and $13,499, respectively)								27,344			13,428
Equity security, at fair value		1,132			—			1,234			—
Loans held for sale		5,142			2,946			4,369			2,946
Loans:
Loans held for investment		368,252			357,950			454,856			357,950
Less allowance for loan losses		(2,627	)		(1,981	)		(3,426	)		(1,981	)
Net loans held for investment		365,625			355,969			451,430			355,969
Premises and equipment, net		16,965			17,062			16,728			17,062
Interest receivable		1,759			1,666			2,284			1,666
Restricted stock		1,166			1,144			1,166			1,144
Bank-owned life insurance		8,832			8,796			8,866			8,796
Other real estate owned		438			494			359			494
Prepaid assets		1,367			714			1,208			714
Other assets		9,217			10,852			10,733			10,852
Total assets	$	674,653		$	656,793		$	748,246		$	656,793

LIABILITIES
Deposits:
Demand noninterest-bearing	$	153,962		$	150,283		$	205,643		$	150,283
Interest checking and money market accounts		323,638			263,136			338,508			263,136
Savings deposits		57,521			57,136			66,221			57,136
Time deposits, $250,000 and over		12,160			55,682			9,678			55,682
Other time deposits		57,045			59,641			54,048			59,641
Total deposits		604,326			585,878			674,098			585,878
Short-term borrowed funds		525			626			499			626
Long-term debt		9,992			9,992			10,992			9,992
Interest payable		38			55			29			55
Other liabilities		9,735			11,384			9,973			11,384
Total liabilities		624,616			607,935			695,591			607,935

Off balance sheet items, commitments and contingencies (Note 10)

SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,984,582 and 7,095,920, respectively		8,731			8,870
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,970,141 and 7,095,920, respectively								8,713			8,870
Preferred stock, 10,000,000 shares authorized; none issued and outstanding		—			—			—			—
Additional paid-in capital		12,311			12,784			12,250			12,784
Undivided profits		16,413			16,226			17,874			16,226
Accumulated other comprehensive income		1,927			323			3,163			323
Total Uwharrie Capital shareholders’ equity		39,382			38,203			42,000			38,203
Noncontrolling interest		10,655			10,655			10,655			10,655
Total shareholders’ equity		50,037			48,858			52,655			48,858
Total liabilities and shareholders’ equity	$	674,653		$	656,793		$	748,246		$	656,793

	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(in thousands, except share and per share data)						(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	4,553		$	4,667		$	5,031		$	4,735		$	9,584		$	9,402
Investment securities
U.S. Treasury		33			33			33			32			66			65
U.S. Government agencies and corporations		369			348			357			345			726			693
State and political subdivisions. non-taxable		99			106			195			88			294			194
State and political subdivisions, taxable		90			9			179			25			269			34
Interest-earning deposits with banks and federal funds sold		552			793			38			687			590			1,480
Total interest income		5,696			5,956			5,833			5,912			11,529			11,868

Interest Expense
Interest checking and money market accounts		298			425			180			343			478			768
Savings deposits		21			27			14			26			35			53
Time deposits, $250,000 and over		256			65			44			237			300			302
Other time deposits		153			80			134			156			287			236
Short-term borrowed funds		1			6			1			5			2			11
Long-term debt		131			141			144			141			275			282
Total interest expense		860			744			517			908			1,377			1,652
Net interest income		4,836			5,212			5,316			5,004			10,152			10,216
Provision for (recovery of) loan losses		632			(113	)		767			(315	)		1,399			(428	)
Net interest income after provision for (recovery of) loan losses		4,204			5,325			4,549			5,319			8,753			10,644

Noninterest Income
Service charges on deposit accounts		313			327			209			341			522			668
Interchange and card transaction fees, net		192			194			182			204			374			398
Other service fees and commissions		765			756			558			573			1,323			1,329
Gain (loss) on sale of securities (includes reclassification of $58 and $0 from accumulated other comprehensive income)		58			—
Gain on sale of securities (includes reclassification of $0, $0, $58 and $0 from accumulated other comprehensive income)								—			—			58			—
Unrealized gain on equity security		231			—			102			—			333			—
Income from mortgage loan sales		1,065			492			3,701			1,087			4,766			1,579
Other income		382			(21	)
Other income (expense)								(324	)		2			58			(19	)
Total noninterest income		3,006			1,748			4,428			2,207			7,434			3,955

Noninterest Expense
Salaries and employee benefits		4,424			4,133			5,030			4,252			9,454			8,385
Net occupancy expense		415			405			416			418			831			823
Equipment expense		183			176			179			183			362			359
Data processing costs		158			222			162			172			320			394
Loan costs		87			89			167			56			254			145
Foreclosed real estate expense		(7	)		56
Foreclosed real estate expense (income)								(14	)		4			(21	)		60
Professional fees and services		194			153			209			199			403			352
Marketing and donations		219			204			192			173			411			377
Electronic banking expense		105			99			121			102			226			201
Software amortization and maintenance		264			219			300			225			564			444
FDIC insurance		17			80			91			52			108			132
Other noninterest expense		738			364			93			462			831			826
Total noninterest expense		6,797			6,200			6,946			6,298			13,743			12,498
Income before income taxes		413			873			2,031			1,228			2,444			2,101
Income taxes (includes reclassification of ($11) and $0 from accumulated other comprehensive income)		85			183
Income taxes (includes reclassification of $0, $0, ($11) and $0 from accumulated other comprehensive income)								429			277			514			460
Net income	$	328		$	690		$	1,602		$	951		$	1,930		$	1,641

Consolidated net income	$	328		$	690		$	1,602		$	951		$	1,930		$	1,641
Less: net income attributable to noncontrolling interest		(141	)		(140	)		(141	)		(140	)		(282	)		(280	)
Net income attributable to Uwharrie Capital Corp and common shareholders		187			550			1,461			811			1,648			1,361
Net income per common share
Basic	$	0.03		$	0.08		$	0.21		$	0.11		$	0.23		$	0.19
Diluted	$	0.03		$	0.08		$	0.21		$	0.11		$	0.23		$	0.19
Weighted average shares outstanding
Basic		7,067,752			7,268,075			6,983,493			7,237,290			7,025,622			7,252,598
Diluted		7,067,752			7,268,075			6,983,493			7,237,290			7,025,622			7,252,598

	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(in thousands)						(in thousands)

Net income	$	328		$	690		$	1,602		$	951		$	1,930		$	1,641

Unrealized gain on available for sale securities		2,141			953			1,606			1,367			3,747			2,320
Related tax effect		(490	)		(219	)		(370	)		(314	)		(860	)		(533	)
Reclassification of gain recognized in net income		(58	)		—			—			—			(58	)		—
Related tax effect		11			—			—			—			11			—
												��
Total other comprehensive income		1,604			734			1,236			1,053			2,840			1,787

Comprehensive income		1,932			1,424			2,838			2,004			4,770			3,428

Less: Comprehensive income attributable to noncontrolling interest		(141	)		(140	)		(141	)		(140	)		(282	)		(280	)

Comprehensive income attributable to Uwharrie Capital	$	1,791		$	1,284		$	2,697		$	1,864		$	4,488		$	3,148

	Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits		Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total			Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits		Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total
	(dollars in thousands, except share data)																				(dollars in thousands, except share data)
Balance, December 31, 2018		7,126,541		$	8,908		$	12,885		$	14,421	$	(1,694	)	$	10,655		$	45,175
Balance, March 31, 2019																						7,097,227		$	8,871		$	12,776		$	14,971	$	(960	)	$	10,655		$	46,313
Net Income		—			—			—			550		—			140			690			—			—			—			811		—			140			951
Repurchase and retirement of common stock		(29,314	)		(37	)		(109	)		—		—			—			(146	)		(25,165	)		(31	)		(93	)		—		—			—			(124	)
Other comprehensive income		—			—			—			—		734			—			734			—			—			—			—		1,053			—			1,053
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—		—			(103	)		(103	)		—			—			—			—		—			(103	)		(103	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—		—			(37	)		(37	)		—			—			—			—		—			(37	)		(37	)
Balance, March 31, 2019		7,097,227		$	8,871		$	12,776		$	14,971	$	(960	)	$	10,655		$	46,313
Balance, June 30, 2019																						7,072,062		$	8,840		$	12,683		$	15,782	$	93		$	10,655		$	48,053
																																							—
Balance, December 31, 2019		7,095,920		$	8,870		$	12,784		$	16,226	$	323		$	10,655		$	48,858
Balance, March 31, 2020																						6,984,582		$	8,731		$	12,311		$	16,413	$	1,927		$	10,655		$	50,037
Net Income		—			—			—			187		—			141			328			—			—			—			1,461		—			141			1,602
Repurchase and retirement of common stock		(111,338	)		(139	)		(473	)		—		—			—			(612	)		(14,441	)		(18	)		(61	)		—		—			—			(79	)
Other comprehensive income		—			—			—			—		1,604			—			1,604			—			—			—			—		1,236			—			1,236
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—		—			(104	)		(104	)		—			—			—			—		—			(104	)		(104	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—		—			(37	)		(37	)		—			—			—			—		—			(37	)		(37	)
Balance, March 31, 2020		6,984,582		$	8,731		$	12,311		$	16,413	$	1,927		$	10,655		$	50,037
Balance, June 30, 2020																						6,970,141		$	8,713		$	12,250		$	17,874	$	3,163		$	10,655		$	52,655

	Number of Common Shares Issued			Common Stock			Additional Paid-in Capital			Undivided Profits		Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2018		7,126,541		$	8,908		$	12,885		$	14,421	$	(1,694	)	$	10,655		$	45,175
Net Income		—			—			—			1,361		—			280			1,641
Repurchase and retirement of common stock		(54,479	)		(68	)		(202	)		—		—			—			(270	)
Stock options exercised		—			—			—			—		—			—			—
Other comprehensive income		—			—			—			—		1,787			—			1,787
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—		—			(206	)		(206	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—		—			(74	)		(74	)
Balance, June 30, 2019		7,072,062		$	8,840		$	12,683		$	15,782	$	93		$	10,655		$	48,053

Balance, December 31, 2019		7,095,920		$	8,870		$	12,784		$	16,226	$	323		$	10,655		$	48,858
Net Income		—			—			—			1,648		—			282			1,930
Repurchase and retirement of common stock		(125,779	)		(157	)		(534	)		—		—			—			(691	)
Other comprehensive income		—			—			—			—		2,840			—			2,840
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—		—			(208	)		(208	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—		—			(74	)		(74	)
Balance, June 30, 2020		6,970,141		$	8,713		$	12,250		$	17,874	$	3,163		$	10,655		$	52,655

	Three Months Ended March 31,						Six Months Ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)						(dollars in thousands)
Cash flows from operating activities
Net income	$	328		$	690		$	1,930		$	1,641
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization		285			271			574			536
Provision for (recovery of) loan losses		632			(113	)		1,399			(428	)
Gain on sale of securities available for sale		(58	)		—			(58	)		—
Gain on sale of premises and equipment								—			(4	)
(Gain) loss on sale of OREO		(42	)		37			(53	)		38
OREO write-downs		21			—			21			—
Unrealized gain on equity securities		(231	)		—			(333	)		—
Net amortization of premium on investment securities AFS		98			162			241			341
Net amortization of premium on investment securities HTM		26			36			71			70
Net amortization of mortgage servicing rights		187			172			35			332
Originations and purchases of mortgage loans for sale		(27,736	)		(19,115	)		(126,653	)		(54,120	)
Proceeds from sales of mortgage loans for sale		25,358			20,180			125,200			56,076
Accrued interest receivable		(93	)		114			(618	)		30
Prepaid assets		(653	)		(422	)		(494	)		(551	)
Cash surrender value of life insurance		(36	)		(28	)		(70	)		(55	)
Miscellaneous other assets		1,151			523			365			367
Accrued interest payable		(17	)		25			(26	)		31
Miscellaneous other liabilities		(1,649	)		1,690			(1,411	)		2,486
Net cash provided (used) by operating activities		(2,429	)		4,222
Net cash provided by operating activities								120			6,790

Cash flows from investing activities
Proceeds from sales of investment securities available for sale		7,586			—			7,586			—
Proceeds from maturities, calls & paydowns of investment securities held to maturity		1,668			128			2,593			128
Proceeds from maturities, calls & paydowns of investment securities available for sale		1,471			1,353			3,425			15,975
Purchase of investment securities held to maturity		(4,064	)		—			(16,580	)		—
Purchase of investment securities available for sale		(26,694	)		—			(29,574	)		(10,438	)
Purchase of equity securities		(901	)		—			(901	)		—
Purchase of investments in other assets								(1,100	)		—
Net change in restricted stock		(22	)		(50	)		(22	)		(50	)
Net (increase) decrease in loans		(10,288	)		1,980
Net increase in loans								(96,860	)		(4,363	)
Purchase of premises and equipment		(188	)		(1,938	)		(240	)		(2,721	)
Proceeds from sale of OREO		77			229			167			323
Net cash provided (used) by investing activities		(31,355	)		1,702
Proceeds from sales of premises, equipment and other assets								—			166
Net cash used by investing activities								(131,506	)		(980	)

Cash flows from financing activities
Net increase in deposit accounts		18,448			19,611
Net increase (decrease) in deposit accounts								88,220			(9,985	)
Net decrease in federal funds purchased
and securities sold under agreements to repurchase and other short-term borrowings		(101	)		213			(127	)		(351	)
Proceeds from long-term borrowings								1,000			—
Common stock repurchased		(612	)		(146	)		(691	)		(270	)
Dividends paid on preferred stock (noncontrolling interest)		(141	)		(140	)		(282	)		(280	)
Net cash provided by financing activities		17,594			19,538
Increase (decrease) in cash and cash equivalents		(16,190	)		25,462
Net cash provided (used) by financing activities								88,120			(10,886	)
Decrease in cash and cash equivalents								(43,266	)		(5,076	)
Cash and cash equivalents, beginning of period		155,198			117,934			155,198			117,934
Cash and cash equivalents, end of period	$	139,008		$	143,396		$	111,932		$	112,858

Supplemental Disclosures of Cash Flow Information
Interest paid	$	767		$	719		$	1,293		$	1,662
Income taxes paid		—			—			615			508
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax	$	1,604		$	(734	)	$	2,840		$	1,787
Mortgage servicing rights capitalized		373			83			1,367			243
Company financed OREO								90			70

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management continues to evaluate the impact of COVID-19, the disease caused by the novel Coronavirus, beyond the current impacts as of ~~March 31,~~June 30, 2020, which are discussed throughout the accompanying notes of this report. Management is not aware of additional economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2019 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 4, 2020. This Quarterly Report should be read in conjunction with such Annual Report.

Congress, the President, ~~and~~ 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 (“CARES”) Act was signed into law at the end of March 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. 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, the Company is providing a payment deferral option for commercial and consumer loans adversely affected by the pandemic. In accordance with ~~interagency guidance issued in March 2020,~~the CARES Act, these modifications are not required to be reported as troubled debt restructurings. 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. As of ~~April 28,~~June 30, 2020, ~~173~~179 outstanding loans ~~had been~~were modified with a recorded investment of ~~$50.8~~$55.3 million. Six modified loans with original deferred balances totaling $634,000 have come out of deferment during the period, four of which were paid-off and two of which were out of accommodation and current at June 30, 2020.

With the passage of the Paycheck Protection Program (“PPP”) as part of the CARES Act, administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources 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 ~~April 28,~~June 30, 2020, the Company has funded ~~492~~1,004 PPP loans representing ~~$51.2~~$77.3 million. The Company projects to fund an additional ~~250 loans for approximately $25 million. It is the~~120

loans for approximately $2 million as of the date of this report. It is the Company’s understanding that loans funded through the PPP ~~program~~ 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, ~~and~~ 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 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.

Certain amounts in the 2019 financial statements have been reclassified to conform to the 2020 presentation. These reclassifications dodid not have an impact on net income or shareholders’ equity.

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

The following table presents the changes in accumulated other comprehensive income (loss) for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:

	For the Three Months Ended March 31,						For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2020			2019			2020		2019			2020			2019
	(dollars in thousands)						(dollars in thousands)

Beginning balance	$	323		$	(1,694	)	$	1,927	$	(960	)	$	323		$	(1,694	)

Other comprehensive income before reclassifications, net of ($490) and ($219) tax effect, respectively		1,651			734
Other comprehensive income before reclassifications, net of ($370), ($314), ($860) and ($533) tax effect, respectively								1,236		1,053			2,887			1,787

Amounts reclassified from accumulated other comprehensive income, net of $11 and $0 tax effect, respectively		(47	)		—
Amounts reclassified from accumulated other comprehensive income, net of $0, $0, $11 and $0 tax effect, respectively								—		—			(47	)		—

Net current-period other comprehensive income		1,604			734			1,236		1,053			2,840			1,787

Ending balance	$	1,927		$	(960	)	$	3,163	$	93		$	3,163		$	93

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

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance

of common stock that then shared in the net income of the Company. The Company had no stock options outstanding at ~~March 31,~~June 30, 2020 or December 31, 2019.

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

The weighted average number of common shares outstanding was ~~7,067,752~~6,983,493 for the three-month period ~~ending March 31,~~ended June 30, 2020 compared to ~~7,268,075~~7,237,290 for the three-month period ~~ending March 31,~~ended June 30, 2019. For the six-month period ended June 30, 2020, the weighted average common shares outstanding was 7,025,622 compared to 7,252,598 for the six-month period ended June 30, 2019. The number of shares and earnings per share for the 2019 periods have been adjusted for the 2% stock dividend declared on November 12, 2019.

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

March 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2020									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)								(dollars in thousands)
Securities available for sale
U.S. Treasury	$	4,984	$	61	$	—	$	5,045	$	4,992	$	32	$	—	$	5,024
U.S. Government agencies		28,926		626		9		29,543		28,836		667		19		29,484
GSE - Mortgage-backed securities and CMO’s		34,932		1,713		25		36,620		32,983		1,964		24		34,923
State and political subdivisions		27,963		334		50		28,247		30,775		1,270		40		32,005
Corporate bonds		8,897		3		151		8,749		8,900		314		57		9,157
Total securities available for sale	$	105,702	$	2,737	$	235	$	108,204	$	106,486	$	4,247	$	140	$	110,593

March 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2020									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)								(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	524	$	24	$	—	$	548	$	523	$	13	$	—	$	536
State and political subdivisions		10,763		47		4		10,806		19,321		998		—		20,319
Corporate bonds		4,511		—		1		4,510		7,500		2		—		7,502
Total securities held to maturity	$	15,798	$	71	$	5	$	15,864	$	27,344	$	1,013	$	—	$	28,357

At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 for both periods, and Federal Home Loan Bank (FHLB) stock of $657,000 and $635,000, respectively. The investments in FRB stock and

FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and is classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at ~~March 31,~~June 30, 2020.

Results from sales of securities available for sale for the three and six month periods ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019 are as follows:

	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
	(dollars in thousands)				(dollars in thousands)
Gross proceeds from sales	$	7,586	$	—	$	—	$	—	$	7,586	$	—

Realized gains from sales	$	58	$	—	$	—	$	—	$	58	$	—
Realized losses from sales		—		—		—		—		—		—
Net realized gains (losses)	$	58	$	—	$	—	$	—	$	58	$	—

At ~~March 31,~~June 30, 2020 and December 31, 2019, securities available for sale with a carrying amount of ~~$61.7~~$66.3 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 ~~March 31,~~June 30, 2020 and December 31, 2019. These unrealized losses on investment securities are a result of temporary fluctuations in market prices and are in no way a reflection of the credit quality of the investments. At ~~March 31,~~June 30, 2020, the unrealized losses on available for sale securities less than twelve months related to ~~one GSE~~three government-sponsored enterprise (“GSE”) mortgage backed ~~security, five~~securities, two state and political subdivision bonds, ~~and four corporate bonds. The Company had one~~two government agency bond and one GSE mortgage backed security at March 31, 2020, that had been in a loss position for twelve months or more. At March 31, 2020, the unrealized losses on held to maturity securities less than twelve months related to one state and political subdivision bondbonds, and one corporate bond. At December 31, 2019, the unrealized losses 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~~bond. At December 31, 2019, the Company had four government agency bonds and nine GSE mortgage backed securities that had been in a loss position for twelve months or more. At December 31, 2019, the unrealized losses for less than twelve months on held to maturity securities related to one corporate bond.

Less than 12 Months

12 Months or More

Total

March 31, 2020

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

(dollars in thousands)

Securities held to maturity temporary impairment

State and political subdivisions

$
1,002

$
4

$
—

$
—

$
1,002

$
4

Corporate bonds

1,509

1

—

—

1,509

1

Total securities held to maturity

$
2,511

$
5

$
—

$
—

$
2,511

$
5

	Less than 12 Months				12 Months or More				Total
June 30, 2020	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	$	3,156	$	19	$	—	$	—	$	3,156	$	19
GSE-Mortgage-backed securities and CMO’s		4,574		24		—		—		4,574		24
State and political subdivisions		1,442		40		—		—		1,442		40
Corporate bonds		2,151		57		—		—		2,151		57
Total securities available for sale	$	11,323	$	140	$	—	$	—	$	11,323	$	140

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 quality but that the losses are temporary in nature. At ~~March 31,~~June 30, 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 aggregate amortized cost and fair value of the available for sale securities portfolio at ~~March 31,~~June 30, 2020 by remaining contractual maturity are as follows:

	March 31, 2020							June 30, 2020
	Amortized Cost		Estimated Fair Value		Book Yield			Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)							(dollars in thousands)
Securities available for sale

U.S. Treasury
Due after one but within five years		4,984		5,045		2.66	%
Due within twelve months									4,992		5,024		2.66	%
		4,984		5,045		2.66	%		4,992		5,024		2.66	%
U.S. Government agencies
Due after one but within five years		18,964		19,321		1.55	%		18,971		19,346		1.55	%
Due after five but within ten years		8,298		8,556		1.76	%		9,865		10,138		1.90	%
Due after ten years		1,664		1,666		1.88	%
		28,926		29,543		1.63	%		28,836		29,484		1.67	%
Mortgage-backed securities
Due within twelve months									203		205		3.17	%
Due after one but within five years		892		897		2.50	%		890		900		1.24	%
Due after five but within ten years		18,270		19,629		2.49	%		17,595		19,209		2.41	%
Due after ten years		15,770		16,094		2.09	%		14,295		14,609		1.55	%
		34,932		36,620		2.31	%		32,983		34,923		2.01	%
State and political subdivisions
Due after one but within five years		620		622		5.35	%		1,437		1,445		3.79	%
Due after five but within ten years		1,392		1,413		2.74	%		2,773		2,815		2.14	%
Due after ten years		25,951		26,212		2.86	%		26,565		27,745		2.90	%
		27,963		28,247		2.91	%		30,775		32,005		2.88	%
Corporate bonds
Due within twelve months		2,806		2,804		2.38	%		2,803		2,819		2.06	%
Due after one but within five years		6,091		5,945		3.04	%		6,097		6,338		2.47	%
		8,897		8,749		2.83	%		8,900		9,157		2.34	%
Total securities available for sale
Due within twelve months		2,806		2,804		2.56	%		7,998		8,048		2.46	%
Due after one but within five years		31,551		31,830		2.01	%		27,395		28,029		1.86	%
Due after five but within ten years		27,960		29,598		2.28	%		30,233		32,162		2.22	%
Due after ten years		43,385		43,972		2.54	%		40,860		42,354		2.43	%
	$	105,702	$	108,204		2.34	%	$	106,486	$	110,593		2.23	%

	March 31, 2020							June 30, 2020
	Amortized Cost		Estimated Fair Value		Book Yield			Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)							(dollars in thousands)
Held to maturity

U. S. Government agencies
Due after one but within five years	$	524	$	548		2.89	%	$	523	$	536		2.89	%
		524		548		2.89	%		523		536		2.89	%
State and political subdivisions
Due within twelve months		1,500		1,501		2.53	%		1,500		1,502		2.53	%
Due after one but within five years		3,268		3,314		2.62	%		4,268		4,385		2.50	%
Due after five but within ten years		925		925		2.15	%
Due after ten years		5,070		5,066		2.62	%		13,553		14,432		3.45	%
		10,763		10,806		2.57	%		19,321		20,319		3.17	%
Corporate Bonds
Due within twelve months		1,511		1,510		2.79	%		1,500		1,502		2.79	%
Due after five but within ten years		3,000		3,000		5.50	%		6,000		6,000		5.33	%
		4,511		4,510		4.59	%		7,500		7,502		4.83	%
Total securities held for maturity
Due within twelve months		3,011		3,011		2.66	%		3,000		3,004		2.66	%
Due after one but within five years		3,792		3,862		2.65	%		4,791		4,921		2.54	%
Due after five but within ten years		3,925		3,925		4.71	%		6,000		6,000		5.33	%
Due after ten years		5,070		5,066		2.62	%		13,553		14,432		3.45	%
	$	15,798	$	15,864		3.16	%	$	27,344	$	28,357		3.62	%

The composition of net loans held for investment by class as of ~~March 31,~~June 30, 2020 and December 31, 2019 are as follows:

	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
	(dollars in thousands)						(dollars in thousands)
Commercial
Commercial	$	58,180		$	59,075		$	60,477		$	59,075
SBA Paycheck Protection Program (PPP)								77,298			—
Real estate - commercial		133,618			130,998			137,426			130,998
Other real estate construction loans		29,136			23,043			33,474			23,043
Other loans								2,757			1,939
Noncommercial
Real estate 1-4 family construction		8,882			7,600			8,040			7,600
Real estate - residential		70,965			71,370			74,762			71,370
Home equity		52,801			51,216			51,347			51,216
Consumer loans		12,269			12,957			11,853			12,957
Other loans		2,691			1,939
		368,542			358,198			457,434			358,198
Less:
Allowance for loan losses		(2,627	)		(1,981	)		(3,426	)		(1,981	)
Deferred loan fees, net		(290	)		(248	)
Deferred loan fees net								(2,578	)		(248	)

Loans held for investment, net	$	365,625		$	355,969		$	451,430		$	355,969

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 $172,000 to the reserve that was not present prior to June 30, 2020.

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 from March 31, 2020 to June 30, 2020.

The following table shows the change in the allowance for loss losses by loan segment for the three and six months ended ~~March 31,~~June 30, 2020 and 2019, respectively:

Commercial	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2020		��	2019			2020			2019			2020			2019
	(dollars in thousands)						(dollars in thousands)

Balance, beginning of period	$	1,087		$	1,334			1,512		$	1,281		$	1,087		$	1,334
Provision for (recovery of) loan losses		422			(64	)		580			(350	)		1,002			(414	)
Charge-offs		(3	)		(5	)		(35	)		—			(38	)		(5	)
Recoveries		6			16			54			341			60			357
Net (charge-offs) / Recoveries		3			11			19			341			22			352
Reclassification of reserve for off balance sheet commitments								—			(32	)		—			(32	)
Balance at end of period	$	1,512		$	1,281		$	2,111		$	1,240		$	2,111		$	1,240

Non-Commercial	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(dollars in thousands)						(dollars in thousands)

Balance, beginning of period	$	894		$	1,040		$	1,115		$	952		$	894		$	1,040
Provision for (recovery of) loan losses		210			(49	)		187			35			397			(14	)
Charge-offs		(7	)		(53	)		(17	)		(12	)		(24	)		(65	)
Recoveries		18			14			30			18			48			32
Net (charge-offs) / Recoveries		11			(39	)		13			6			24			(33	)
Reclassification of reserve for off balance sheet commitments								—			(54	)		—			(54	)
Balance at end of period	$	1,115		$	952		$	1,315		$	939		$	1,315		$	939

Total	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(dollars in thousands)						(dollars in thousands)

Balance, beginning of period	$	1,981		$	2,374		$	2,627		$	2,233		$	1,981		$	2,374
Provision for (recovery of) loan losses		632			(113	)		767			(315	)		1,399			(428	)
Charge-offs		(10	)		(58	)		(52	)		(12	)		(62	)		(70	)
Recoveries		24			30			84			359			108			389
Net (charge-offs) / Recoveries		14			(28	)		32			347			46			319
Reclassification of reserve for off balance sheet commitments								—			(86	)		—			(86	)
Balance at end of period	$	2,627		$	2,233		$	3,426		$	2,179		$	3,426		$	2,179

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at ~~March 31,~~June 30, 2020 and December 31, 2019:

March 31, 2020
June 30, 2020
	Individually Evaluated				Collectively Evaluated				Total				Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans		Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)												(dollars in thousands)

Commercial	$	67	$	7,528	$	1,445	$	213,406	$	1,512	$	220,934	$	53	$	5,400	$	2,058	$	303,740	$	2,111	$	309,140
Non-Commercial		91		3,404		1,024		143,914		1,115		147,318		79		3,226		1,236		142,490		1,315		145,716

Total	$	158	$	10,932	$	2,469	$	357,320	$	2,627	$	368,252	$	132	$	8,626	$	3,294	$	446,230	$	3,426	$	454,856

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

March 31, 2020
June 30, 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		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)												(dollars in thousands)

Commercial	$	363	$	37	$	400	$	57,780	$	58,180	$	—	$	—	$	—	$	—	$	60,477	$	60,477	$	—
SBA Paycheck Protection Program (PPP)														—		—		—		75,006		75,006		—
Real estate - commercial		—		2,087		2,087		131,531		133,618		—		—		2,083		2,083		135,343		137,426		—
Other real estate construction		15		1,080		1,095		28,041		29,136		—		55		1,080		1,135		32,339		33,474		—
Real estate 1-4 family construction		—		—		—		8,882		8,882		—		—		—		—		8,040		8,040		—
Real estate - residential		477		844		1,321		69,354		70,675		—		70		711		781		73,695		74,476		—
Home equity		214		80		294		52,507		52,801		—		58		65		123		51,224		51,347		—
Consumer loans		46		—		46		12,223		12,269		—		24		—		24		11,829		11,853		—
Other loans		—		—		—		2,691		2,691		—		—		—		—		2,757		2,757		—

Total	$	1,115	$	4,128	$	5,243	$	363,009	$	368,252	$	—	$	207	$	3,939	$	4,146	$	450,710	$	454,856	$	—

December 31, 2019
	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)

Commercial	$	190	$	—	$	190	$	58,885	$	59,075	$	—
Real estate - commercial		—		2,088	$	2,088		128,910		130,998		—
Other real estate construction		14		—	$	14		23,029		23,043		—
Real estate 1-4 family construction		—		—		—		7,600		7,600		—
Real estate - residential		326		752		1,078		70,044		71,122		—
Home equity		57		82		139		51,077		51,216		—
Consumer loan		27		—		27		12,930		12,957		—
Other loans		—		—		—		1,939		1,939		—

Total	$	614	$	2,922	$	3,536	$	354,414	$	357,950	$	—

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

The Company had ~~$79,000~~$0 in foreclosed residential real estate and ~~$387,000~~$272,000 of residential real estate in process of foreclosure at ~~March 31,~~June 30, 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 composition of ~~nonaccrual~~non-accrual loans by class as of ~~March 31,~~June 30, 2020 and December 31, 2019 was as follows:

					June 30, 2020		December 31, 2019
	March 31, 2020		December 31, 2019		(dollars in thousands)
	(dollars in thousands)
Commercial	$	37	$	—	$	—	$	—
SBA Paycheck Protection Program (PPP)						—		—
Real estate - commercial		2,087		2,088		2,083		2,088
Other real estate construction		1,080		—		1,080		—
Real estate 1 – 4 family construction		—		—		—		—
Real estate – residential		844		752		711		752
Home equity		80		82		65		82
Consumer loans		—		—		—		—
Other loans		—		—		—		—
	$	4,128	$	2,922	$	3,939	$	2,922

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

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at ~~March 31,~~June 30, 2020 and December 31, 2019:

March 31, 2020
June 30, 2020
	Pass		Watch		Sub- standard		Doubtful		Total		Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)										(dollars in thousands)

Commercial	$	55,632	$	2,508	$	40	$	—	$	58,180	$	57,902	$	2,575	$	—	$	—	$	60,477
SBA Paycheck Protection Program (PPP)												75,006		—		—		—		75,006
Real estate - commercial		129,525		1,177		2,916		—		133,618		133,358		1,156		2,912		—		137,426
Other real estate construction		27,349		394		1,393		—		29,136		31,728		392		1,354		—		33,474
Real estate 1 - 4 family construction		8,882		—		—		—		8,882		8,040		—		—		—		8,040
Real estate - residential		67,198		2,377		1,100		—		70,675		71,175		2,336		965		—		74,476
Home equity		51,739		982		80		—		52,801		50,307		975		65		—		51,347
Consumer loans		12,174		82		13		—		12,269		11,759		82		12		—		11,853
Other loans		2,691		—		—		—		2,691		2,757		—		—		—		2,757

Total	$	355,190	$	7,520	$	5,542	$	—	$	368,252	$	442,032	$	7,516	$	5,308	$	—	$	454,856

Loans that are in ~~nonaccrual~~non-accrual status or 90 days past due and still accruing are considered to be nonperforming. At both ~~March 31,~~June 30, 2020 and December 31, 2019 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at ~~March 31,~~June 30, 2020 and December 31, 2019:

March 31, 2020
June 30, 2020
	Performing		Non- Performing		Total		Performing		Non- Performing		Total
	(dollars in thousands)						(dollars in thousands)

Commercial	$	58,143	$	37	$	58,180	$	60,477	$	—	$	60,477
SBA Paycheck Protection Program (PPP)								75,006		—		75,006
Real estate - commercial		131,531		2,087		133,618		135,343		2,083		137,426
Other real estate construction		28,056		1,080		29,136		32,394		1,080		33,474
Real estate 1 – 4 family construction		8,882		—		8,882		8,040		—		8,040
Real estate – residential		69,831		844		70,675		73,765		711		74,476
Home equity		52,721		80		52,801		51,282		65		51,347
Consumer loans		12,269		—		12,269		11,853		—		11,853
Other loans		2,691		—		2,691		2,757		—		2,757

Total	$	364,124	$	4,128	$	368,252	$	450,917	$	3,939	$	454,856

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at ~~March 31,~~June 30, 2020 and December 31, 2019.

March 31, 2020
June 30, 2020
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)								(dollars in thousands)

Commercial	$	82	$	40	$	42	$	35	$	693	$	41	$	652	$	20
SBA Paycheck Protection Program (PPP)										—		—		—		—
Real estate - commercial		3,598		2,088		1,510		28		3,584		2,084		1,500		30
Other real estate construction		3,848		1,079		2,769		4		1,123		1,080		43		3
Real estate 1 - 4 family construction		—		—		—		—		—		—		—		—
Real estate - residential		3,304		1,369		1,935		83		3,143		1,698		1,445		72
Home equity		80		13		67		8		65		19		46		7
Consumer loans		20		—		20		—		18		—		18		—
Other loans		—		—		—		—		—		—		—		—

Total	$	10,932	$	4,589	$	6,343	$	158	$	8,626	$	4,922	$	3,704	$	132

December 31, 2019
									Three Months ended June 30, 2020				Three Months ended June 30, 2019
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)								(dollars in thousands)

Commercial	$	4	$	—	$	4	$	—	$	388	$	17	$	6	$	—
SBA Paycheck Protection Program (PPP)										—		—		—		—
Real estate - commercial		3,612		1,923		1,689		29		3,591		13		1,434		15
Other real estate construction		44		—		44		3		1,123		—		69		—
Real estate 1 - 4 family construction		—		—		—		—
Real estate 1- 4 family construction										—		—		—		—
Real estate - residential		3,070		987		2,083		99		3,223		29		2,975		33
Home equity		82		13		69		10		73		—		124		3
Consumer loans		23		—		23		—		19		1		28		—
Other loans										—		—		—		—

Total	$	6,835	$	2,923	$	3,912	$	141	$	8,417	$	60	$	4,636	$	51

	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019				Six Months Ended June 30, 2020				Six Months Ended June 30, 2019
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)								(dollars in thousands)

Commercial	$	82	$	—	$	7	$	—	$	260	$	17	$	6	$	—
SBA Paycheck Protection Program (PPP)										—		—		—		—
Real estate - commercial		3,598		29		1,201		19		3,598		42		1,375		35
Other real estate construction		3,848		43		92		1		763		1		77		1
Real estate 1- 4 family construction		—		—		—		—		—		—		—		—
Real estate - residential		3,303		40		2,966		39		3,172		69		2,985		72
Home equity		124		1		81		1		76		1		110		4
Consumer loans		28		—		30		1		20		1		29		1
Other loans		—		—		—		—		—		—		—		—

Total	$	10,983	$	113	$	4,377	$	61	$	7,889	$	131	$	4,582	$	113

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

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

At ~~March 31,~~June 30, 2020, the Company had ~~$6.9~~$4.8 million in TDRs outstanding, of which two with balances totaling ~~$72,000~~$69,000 were on a non-accruing basis. Comparatively, the Company had $3.9 million of outstanding TDRs, of which one with a balance of $26,000 was non-accruing, at December 31, 2019.

For the three and six months ended ~~March 31,~~June 30, 2020 and 2019, the following table presents a breakdown of the types of concessions made by loan class:

	For the three months ended March 31, 2020						For the three months ended June 30, 2020
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)						(dollars in thousands)

Other:
Commercial		1	$	41	$	41		1	$	650	$	650
SBA Paycheck Protection Program (PPP)								—		—		—
Real estate - commercial		—		—		—		1		829		829
Other real estate construction		1		2,725		2,725		—		—		—
Real estate 1 – 4 family construction		—		—		—		—		—		—
Real estate – residential		2		335		332		1		114		114
Home equity		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Other loans		—		—		—		—		—		—

Total		4	$	3,101	$	3,098		3	$	1,593	$	1,593

	For the three months ended March 31, 2019						For the three months ended June 30, 2019
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)						(dollars in thousands)

Other:
Commercial		—	$	—	$	—		—	$	—	$	—
Real estate - commercial		1		1,629		806		1		1,629		857
Other real estate construction		—		—		—		—		—		—
Real estate 1 – 4 family construction		—		—		—		—		—		—
Real estate – residential		—		—		—		—		—		—
Home equity		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Other loans		—		—		—		—		—		—

Total		1	$	1,629	$	806		1	$	1,629	$	857

During the twelve months ended ~~March 31,~~June 30, 2020, there were two TDRs for which there was a payment default. During the twelve months ended ~~March 31,~~June 30, 2019, there was ~~one~~two TDR for which there was a payment default.

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has ~~$114,000~~$133,000 in the allowance for loan losses as of ~~March 31,~~June 30, 2020, as a direct result of these TDRs. At ~~March 31,~~June 30, 2019, there was ~~$136,000~~$117,000 in the allowance for loan losses related to TDRs.

The following table presents the status of the types of ~~loan modifications~~loans modified as TDRs within the previous twelve months as of ~~March 31,~~June 30, 2020 and 2019:

	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default				Paid In Full				Paying as restructured				Converted to non-accrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)																(dollars in thousands)
March 31, 2020
June 30, 2020

Below market
Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Below market interest rate																		—	$	—		1	$	219		—	$	—		—	$	—
Extended payment Terms		—		—		1		221		—		—		—		—		—		—		—		—		—		—		—		—
Forgiveness of Principal/Other		1		37		6		3,094		1		46		—		—		1		37		10		2,434		1		46		—		—

Total		1	$	37		7	$	3,315		1	$	46		0	$	0		1	$	37		11	$	2,653		1	$	46		—	$	—

March 31, 2019
June 30, 2019

Below market
Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Below market interest rate																		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment Terms		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Forgiveness of Principal/Other		7		1,018		6		1,992		—		—		1		242		5		895		4		1,847		—		—		2		282

Total		7	$	1,018		6	$	1,992		—	$	—		1	$	242		5	$	895		4	$	1,847		—	$	—		2	$	282

Effective March 2020, the ~~CARES Act (Coronavirus~~Coronavirus Aid, Relief, and Economic ~~Security)~~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 Company has elected to adopt this suspension until December 31, 2020 or sixty days after the national emergency terminates, per the CARES Act. Modifications of loans 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”. ~~These loans will continue to accrue interest and will not be considered non-accrual or as a classified loan.~~

The Company is initially providing up to a three-month deferral period or conversion to interest only repayment for up to three months. 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. As of ~~March 31,~~June 30, 2020, the Company had modified 61179 current outstanding loans with a recorded investment of ~~$26.6~~$55.3 million.

As of ~~March 31,~~June 30, 2020, the Company’s modifications of loans for COVID-19 related reasons are disclosed in the table below:

	Interest only				Payment deferral				Other				Total COVID-19 modifications					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		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)																	(dollars in thousands)
March 31, 2020															��
June 30, 2020

Commercial		1	$	35		7	$	1,327		—	$	—		8		$	1,362		2	$	232		25	$	2,520		—	$	—		27	$	2,752
Real estate - commercial		6		11,288		18		11,381		1		177		25			22,846		14		15,626		50		25,443		—		—		64		41,069
Other real estate construction		1		350		—		—		—		—		1			350		1		350		7		4,493		—		—		8		4,843
Other loans																			—		—		1		10		—		—		1		10
Real estate – residential		—		—		8		1,308		—		—		8			1,308		1		149		38		5,818		—		—		39		5,967
Home equity		—		—		1		20		—		—		1			20		—		—		7		349		—		—		7		349
Consumer loans		4		24		13		634		1		20		18			678		8		84		24		238		1		20		33		342
Total		12		11,697		47		14,670		2		197		61			26,564		26		16,441		152		38,871		1		20		179		55,332

Operating leases in which we are the lessee are recorded as operating lease right of use (“ROU”) assets and operating lease liabilities, included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.

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

Our leases relate to three office locations, two of which are branch locations, with remaining terms of two to ten years. Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise and they are not included in the lease term. As of ~~March 31,~~June 30, 2020, operating lease ROU assets were ~~$1.9~~$1.8 million and the lease liability was $1.9 million, compared to ROU assets and a lease liability of ~~$1.9~~$2.1 million for both at ~~March 31,~~June 30, 2019. Lease costs associated with all leases is $96,000 and ~~$111,000~~$192,000 for the three and six months ended ~~March 31,~~June 30, 2020 ~~and 2019,~~ respectively.

	Three Months Ended March 31,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands except percent and period data)						(in thousands except percent and period data)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	94		$	84		$	189		$	169
Right-of-use assets		1,864			1,940
Right-of-use assets obtained in exchange for new operating lease liabilities								1,782			2,107
Weighted-average remaining lease term - operating leases, in years		7.4			7.7			7.3			7.9
Weighted-average discount rate - operating leases		2.9	%		3.0	%		2.9	%		2.8	%


	March 31, 2020			June 30, 2020
	(in thousands)			(in thousands)

2020	$	287		$	192
2021		347			347
2022		225			225
2023		229			229
2024		233			233
2025 and thereafter		846			846
Total lease payments		2,167			2,072
Less: Interest		(235	)		(222	)
Present value of lease liabilities		1,932			1,850

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

The Bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the

borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured.

At ~~March 31,~~June 30, 2020, outstanding financial instruments whose contract amounts represent credit risk were approximately:

			June 30, 2020		December 31, 2019
			(dollars in thousands)
	(dollars in thousands)
Commitments to extend credit	$	140,749	$	141,185	$	134,241
Credit card commitments		11,922		13,042		11,650
Standby letters of credit		1,218		1,216		1,213
Total commitments	$	153,889	$	155,443	$	147,104

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

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

Among the Company’s assets and liabilities, investment securities available for sale 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 value; 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; and

goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

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

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

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

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of ~~March 31,~~June 30, 2020 and December 31, 2019:

	March 31, 2020								June 30, 2020
	(dollars in thousands)								(dollars in thousands)
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	5,045	$	5,045	$	—	$	—	$	5,024	$	5,024	$	—	$	—
U.S. Government agencies		29,543		—		29,543		—		29,484		—		29,484		—
GSE - Mortgage-backed securities and CMO’s		36,620		—		36,620		—		34,923		—		34,923		—
State and political subdivisions		28,247		—		28,247		—		32,005		—		32,005		—
Corporate bonds		8,749		—		8,749		—		9,157		—		9,157		—
Equity securities										1,234		1,234		—		—

Total assets at fair value	$	108,204	$	5,045	$	103,159	$	—
Total assets at fair value on a recurring basis									$	111,827	$	6,258	$	105,569	$	—

	December 31, 2019								December 31, 2019
	(dollars in thousands)								(dollars in thousands)
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

Securities available for sale:
U.S. Treasury	$	5,012	$	5,012	$	—	$	—	$	5,012	$	5,012	$	—	$	—
U.S. Government agencies		25,686		—		25,686		��		25,686		—		25,686		—
GSE - Mortgage-backed securities and CMO’s		38,576		—		38,576		—		38,576		—		38,576		—
State and political subdivisions		14,221		—		14,221		—		14,221		—		14,221		—
Corporate bonds		5,029		—		5,029		—		5,029		—		5,029		—

Total assets at fair value	$	88,524	$	5,012	$	83,512	$	—
Total assets at fair value on a recurring basis									$	88,524	$	5,012	$	83,512	$	—

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. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of ~~March 31,~~June 30, 2020 and December 31, 2019:

	March 31, 2020								June 30, 2020
	(dollars in thousands)								(dollars in thousands)
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

Impaired loans	$	6,185	$	—	$	—	$	6,185	$	6,289	$	—	$	—	$	6,289
Other real estate owned		359		—		—		359		359		—		—		359
Total assets at fair value	$	6,544	$	—	$	—	$	6,544
Total assets at fair value on a nonrecurring basis									$	6,648	$	—	$	—	$	6,648

	December 31, 2019								December 31, 2019
	(dollars in thousands)								(dollars in thousands)
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

Impaired loans	$	3,771	$	—	$	—	$	3,771	$	3,771	$	—	$	—	$	3,771
Other real estate owned		364		—		—		364		364		—		—		364

Total assets at fair value	$	4,135	$	—	$	—	$	4,135
Total assets at fair value on a nonrecurring basis									$	4,135	$	—	$	—	$	4,135

At ~~March 31,~~June 30, 2020, impaired loans were being evaluated with discounted expected cash flows ~~and~~or discounted appraisals were being used on collateral dependent loans.

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

valuations at ~~March 31,~~June 30, 2020 are observed under the exit price notion as a result of adoption of ASU 2016-01. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of ~~March 31,~~June 30, 2020 and December 31, 2019:

March 31, 2020
June 30, 2020
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3		Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)										(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	139,008	$	139,015	$	135,771	$	3,244	$	—	$	111,932	$	111,948	$	109,940	$	2,008	$	—
Securities available for sale		108,204		108,204		5,009		103,195		—		110,593		110,593		5,024		105,569		—
Securities held to maturity		15,798		15,864		—		12,864		3,000		27,344		28,357		—		22,357		6,000
Equity securities		1,132		1,132		1,132		—		—		1,234		1,234		1,234		—		—
Loans held for investment, net		365,625		367,631		—		—		367,631		451,430		446,916		—		—		446,916
Loans held for sale		5,142		5,142		—		5,142		—		4,369		4,369		—		4,369		—
Restricted stock		1,166		1,166		1,166		—		—		1,166		1,166		1,166		—		—
Loan servicing rights		1,750		2,692		—		2,692		—		2,439		2,641		—		2,641
Accrued interest receivable		1,759		1,759		—		—		1,759		2,284		2,284		—		—		2,284

FINANCIAL LIABILITIES
Deposits	$	604,326	$	592,542	$	—	$	592,542	$	—	$	674,098	$	674,436		—		674,436		—
Short-term borrowings		525		525		—		525		—		499		499		—		499		—
Long-term borrowings		9,992		10,175		—		—		10,175		10,992		11,172		—		—		11,172
Accrued interest payable		38		38		—		—		38		29		29		—		—		29

December 31, 2019
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS							��
Cash and cash equivalents	$	155,198	$	155,202	$	152,957	$	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 ~~March 31,~~June 30, 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; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 10.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. During 2019, the effective date was extended to fiscal years 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. Entities will apply the

standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We have entered into a contract to outsource our current model with a CECL-ready vendor. We are currently

evaluating the various methods of determining credit losses within the software. The impact of the adoption is dependent on loan portfolio composition and credit quality at adoption date, as well as economic conditions and forecasts at that time.

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

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

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: the impact of the novel Coronavirus disease, or COVID-19, 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.

Comparison of Financial Condition at ~~March 31,~~June 30, 2020 and December 31, 2019.

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company’s total assets increased ~~$17.9~~$91.4 million, from $656.8 million to ~~$674.7~~$748.2 million.

Cash and cash equivalents decreased ~~$16.2~~$43.3 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020. The decrease is directly related to the increased investments made in the securities ~~portfolio.~~portfolio in an effort to sustain the yield on earning assets after rates dropped significantly during the first quarter.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased ~~$22.1~~$36.0 million to ~~$124.0~~$137.9 million for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, due to ~~budgeted~~ investments of cash into longer-term, higher yielding assets. At ~~March 31,~~June 30, 2020, the Company had net unrealized gains on securities available for sale of ~~$2.5~~$4.1 million, compared to net unrealized gains of $419,000 as December 31, 2019. The significant improvement is directly related to the decline of the bond yields at ~~March 31,~~June 30, 2020 compared to December 31, 2019, as the market reacted to the COVID-19 outbreak worldwide.

An additional investment was made into an equity security during the ~~three~~six months ended ~~March 31,~~June 30, 2020 of $901,000. The value of the equity security increased ~~$231,000~~$333,000 by the end of the ~~first~~second quarter, resulting in a fair value of ~~$1.1~~$1.2 million for the security at ~~March 31,~~June 30, 2020.

Loans held for investment increased from $358.0 million to ~~$368.3~~$454.9 million, an increase of ~~$10.3~~$96.9 million for the ~~three-month~~six-month period. The Company experienced net growth in nearly all sectors with the largest increase (not including PPP loans) occurring in the other real estate construction segment related to funding on two large hotel loans. During the second quarter of 2020, the Company funded 1,004 SBA PPP loans for a total of $77.3 million. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. Loans held for sale increased ~~74.5%~~48.3%, or ~~$2.2~~$1.4 million, as many of the loans produced near the ~~March 31,~~June 30, 2020 quarter-end date were not sold on the secondary market until early ~~April.~~July. 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 losses was ~~$2.6~~$3.4 million at ~~March 31,~~June 30, 2020, which represented ~~0.71%~~0.75% of the total ~~loan portfolio~~loans held for investment compared to $2.0 million or 0.55% of the total ~~loan portfolio~~loans held for investment 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 ~~other~~loan servicing assets. Prepaid assets have increased ~~$653,000~~$494,000 from December 31, 2019 to ~~March 31,~~June 30, 2020, as annual property and business insurance payments are due during the first quarter of the year. Other assets decreased ~~$1.6 million,~~$834,000 during the first six months of 2020, primarily due to the distribution of supplemental executive retirement plan benefits related to an executive retirement in January 2020. Loan servicing assets increased by $716,000 during the six-month period as a result of the aforementioned production growth within the Company’s mortgage division.

Customer deposits, our primary funding source, experienced ~~a $18.4~~an $88.2 million increase during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, increasing from $585.9 million to ~~$604.3~~$674.1 million, a ~~3.15%~~15.05% 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 ~~$3.7~~$55.3 million and savings deposits increased ~~$385,000.~~$9.1 million. Interest checking and money market accounts increased by ~~$60.5~~$75.4 million, of which ~~$41~~$41.0 million is related to an account that moved from time deposits greater than $250,000. Other time deposits decreased ~~$2.6~~$51.6 million during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020.

Total short-term borrowings decreased ~~$101,000~~$127,000 for the period due to a reduction in consumer overnight sweep accounts. At ~~March 31,~~June 30, 2020, the Company has ~~$10.0~~$11.0 million in long-term debt outstanding, which ~~was comprised~~consisted primarily of its fixed rate junior subordinated debt securities issued on September 30, 2019. 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%. The Company has a $3 million line of credit of which $1 million was in use at June 30, 2020.

Other liabilities decreased from $11.4 million at December 31, 2019 to ~~$9.7~~$10 million at ~~March 31,~~June 30, 2020, a decrease of ~~$2.6~~$1.4 million, primarily due to the distribution of supplemental executive retirement plan benefits related to an executive’s retirement in January 2020.

At ~~March 31,~~June 30, 2020, total shareholders’ equity was ~~$50.0~~$52.7 million, an increase of ~~$1.2~~$3.8 million from December 31, 2019. Net income for the ~~three-month~~six-month period was ~~$328,000.~~$1.9 million. Unrealized gains/losses on investment securities, net of tax, improved by ~~$1.6~~$2.8 million. The Company repurchased ~~111,338~~125,779 shares of common stock ~~for~~at a total ~~value~~cost of ~~$612,000~~$691,000 during the first ~~three~~six months of 2020. The Company paid ~~$141,000~~$282,000 in dividends attributed to noncontrolling interest during the first ~~three~~six months of 2020.

Comparison of Results of Operations for the Three Months Ended ~~March 31,~~June 30, 2020 and 2019.

Uwharrie Capital Corp reported net income of ~~$328,000~~$1.6 million for the three months ended ~~March 31,~~June 30, 2020, as compared to ~~$690,000~~$951,000 for the three months ended ~~March 31,~~June 30, 2019, ~~a decrease~~an increase of ~~$362,000.~~$650,000. Net income available to common shareholders was ~~$187,000,~~$1.5 million or ~~$0.03~~$0.21 per common share, at ~~March 31,~~June 30, 2020, compared to ~~$550,000~~$811,000 or ~~$0.08~~$0.11 per common share, at ~~March 31, 2019, primarily related to the provision expense recognized in the first three months of 2020.~~June 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net interest income for the three months ended ~~March 31,~~June 30, 2020 was ~~$4.8~~$5.3 million, compared to ~~$5.2~~$5.0 million for the three months ended ~~March 31,~~June 30, 2019, ~~a decrease~~an increase of ~~$376,000.~~$312,000. During the ~~first~~second quarter of 2020, the average yield on our interest-earning assets decreased ~~thirty-two~~forty-eight basis points to ~~3.72%~~3.51%, and the average rate we paid for our interest-bearing liabilities ~~increased ten~~decreased thirty-nine basis points to ~~0.77%~~0.44%. The aforementioned changes resulted in a lower interest rate spread of ~~2.95%~~3.07% as of ~~March 31,~~June 30, 2020, compared to ~~3.37%~~3.16% as of ~~March 31,~~June 30, 2019. Our net interest margin was ~~3.17%~~3.20% and ~~3.54%~~3.38% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the three months ended ~~March 31,~~June 30, 2020 and 2019:

(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield						Average Balance				Income/Expenses				Rate/Yield
	2020		2019		2020		2019		2020			2019			2020		2019		2020		2019		2020			2019
Interest-earning assets:
Taxable securities	$	88,396	$	84,488	$	492	$	390		2.24	%		1.87	%	$	108,672	$	82,866	$	569	$	386		2.11	%		1.87	%
Nontaxable securities (1)		16,053		17,150		99		106		3.10	%		3.09	%		26,274		16,839		195		104		3.75	%		3.10	%
Short-term investments		150,879		128,730		552		793		1.47	%		2.50	%		109,195		125,399		38		687		0.14	%		2.20	%
Taxable loans		355,018		363,103		4,485		4,610		5.08	%		5.15	%		422,246		365,105		4,961		4,680		4.73	%		5.14	%
Non-taxable loans (1)		9,792		9,116		68		57		3.49	%		3.13	%		10,010		8,871		70		55		3.51	%		3.14	%
Total interest-earning assets		620,138		602,587		5,696		5,956		3.72	%		4.04	%		676,397		599,080		5,833		5,912		3.51	%		3.99	%

Interest-bearing liabilities:
Interest-bearing deposits		438,683		440,208		728		597		0.67	%		0.55	%		459,397		429,304		372		762		0.33	%		0.71	%
Short-term borrowed funds		501		1,445		1		6		0.80	%		1.68	%		397		1,207		1		5		1.01	%		1.67	%
Long-term debt		9,992		9,974		131		141		5.27	%		5.73	%		11,410		9,972		144		141		5.08	%		5.69	%
Total interest-bearing liabilities		449,176		451,627		860		744		0.77	%		0.67	%
Total interest bearing liabilities																471,204		440,483		517		908		0.44	%		0.83	%

Net interest spread	$	170,962	$	150,960	$	4,836	$	5,212		2.95	%		3.37	%	$	205,193	$	158,597	$	5,316	$	5,004		3.07	%		3.16	%

Net interest margin (1) (% of earning assets)										3.17	%		3.54	%										3.20	%		3.38	%

The provision for loan losses was ~~$632,000~~$767,000 for the three months ~~ending March 31,~~ended June 30, 2020, compared to a recovery of ~~$113,000~~$315,000 for the same period in 2019. There were net loan recoveries of ~~$13,000~~$32,000 for the three months ended ~~March 31,~~June 30, 2020, as compared with net loan ~~charge-offs~~recoveries of ~~$28,000~~$347,000 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 revenue sources is important as well. Total noninterest income increased by ~~$1.3~~$2.2 million for the three-month period ~~ending March 31,~~ended June 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of ~~$573,000~~$2.6 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from ~~the~~ refinance transactions as long-term rates ~~fell~~remained low during the ~~first quarter.~~second quarter of 2020.

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of ~~$231,000,~~$102,000, which is reported in noninterest income.

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

	Three Months Ended March 31,				Three Months Ended June 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)

Income from debit card transactions	$	385	$	342	$	408	$	389
Income from credit card transactions		121		107		91		112
Gross interchange and transaction fee income		506		449		499		501
Network costs - debit card		172		160		172		152
Network costs - credit card		142		95		145		145
Total net income	$	192	$	194	$	182	$	204

Noninterest expense for the three months ended ~~March 31,~~June 30, 2020 increased by ~~$597,000~~$648,000 from ~~March 31,~~June 30, 2019, to ~~$6.8~~$6.9 million. Salaries and benefits, the largest component of noninterest expense, increased ~~$291,000~~$778,000 to account for wage and benefit cost increases as well as increased commissions for increased production in the mortgage division. As a result of production growth in the mortgage division, loan costs increased by $111,000 to $167,000 for the three months ended June 30, 2020. These increases were offset in part by a $401,000 decline in supplemental executive retirement plan expenses due to market value adjustments during the second quarter.

The Company had income tax expense of $429,000 for the three months ended June 30, 2020 at an effective tax rate of 21.1% compared to income tax expense of $277,000 with an effective tax rate of 22.5% in the comparable 2019 period. 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. In 2020, the effective tax rate decreased slightly due to more impact from tax-free instruments.

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019.

Uwharrie Capital Corp reported net income of $1.9 million for the six months ended June 30, 2020, as compared to $1.6 million for the six months ended June 30, 2019, an increase of $289,000. Net income available to common shareholders was $1.6 million, or $0.23 per common share, at June 30, 2020, compared to $1.4 million or $0.19 per common share, at June 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net interest income for the six months ended June 30, 2020 and 2019 was $10.2 million. During the first two quarters of 2020, the average yield on our interest-earning assets decreased forty basis points to 3.61%, and the average rate we paid for our interest-bearing liabilities decreased fifteen basis points to 0.60%. The aforementioned changes resulted in a lower interest rate spread of 3.01% as of June 30, 2020, compared to 3.27% as of June 30, 2019. Our net interest margin was 3.18% and 3.46% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the six months ended June 30, 2020 and 2019:

(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2020		2019		2020		2019		2020			2019
Interest-earning assets:
Taxable securities	$	98,527	$	83,671	$	1,062	$	776		2.17	%		1.87	%
Nontaxable securities (1)		21,170		16,995		293		210		3.50	%		3.12	%
Short-term investments		130,037		127,055		590		1,480		0.91	%		2.35	%
Taxable loans		388,631		364,110		9,447		9,290		4.89	%		5.15	%
Non-taxable loans (1)		9,902		8,993		137		112		3.50	%		3.15	%
Total interest-earning assets		648,267		600,824		11,529		11,868		3.61	%		4.01	%

Interest-bearing liabilities:
Interest-bearing deposits		449,040		434,726		1,100		1,359		0.49	%		0.63	%
Short-term borrowed funds		449		1,326		2		11		0.90	%		1.67	%
Long-term debt		10,701		9,973		275		283		5.17	%		5.72	%
Total interest-bearing liabilities		460,190		446,025		1,377		1,653		0.60	%		0.75	%

Net interest spread	$	188,077	$	154,799	$	10,152	$	10,215		3.01	%		3.27	%

Net interest margin (1) (% of earning assets)										3.18	%		3.46	%

The provision for loan losses was $1.4 million for the six months ended June 30, 2020, compared to a recovery of $428,000 for the same period in 2019. There were net loan recoveries of $46,000 for the six months ended June 30, 2020, as compared with net loan recoveries of $319,000 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 revenue sources is important as well. Total noninterest income increased by $3.5 million for the six-month period ended June 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of $3.2 million in income from mortgage loan sales. 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 during the second quarter of 2020.

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $333,000, which is reported in noninterest income.

Noninterest expense for the six months ended June 30, 2020 increased by $1.2 million from June 30, 2019, to $13.7 million. Salaries and benefits, the largest component of noninterest expense, increased $1.1 million to account for wage and benefit cost increase as well as increased commissions for increased production in the mortgage division. ~~This increase is offset~~As a result of production growth in the mortgage division, loan costs increased by ~~declines in data processing, foreclosed real estate, and FDIC insurance expense. Data processing fees decreased $64,000 from $222,000~~$109,000 to $254,000 for the ~~three~~six months ended March 31, 2019 to $158,000 for the same period in 2020, due to a reduction in overall costs related to the core conversion process that occurred in August 2018. Foreclosed real estate expense decreased $63,000 from $56,000 for the three months ended March 31, 2019 to ($7,000) for the same period in 2020, due to lower costs and a gain, which offset the costs, inJune 30, 2020. FDIC insurance assessments decreased $63,000 from $80,000 for the three months ended March 31, 2019 to $17,000 for the three months ended March 31, 2020. The decrease in this expense category is related to final application of the FDIC assessment credits made available in 2019. The Company expects this expense category will return to normal next quarter.

	Three Months Ended March 31,				Six Months Ended June 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)

Postage	$	44	$	64	$	92	$	108
Telephone and data lines		47		46		93		92
Office supplies and printing		22		27		51		60
Shareholder relations expense		34		39		64		77
Dues and subscriptions		64		61		171		132
Other		527		127		360		357
Total	$	738	$	364	$	831	$	826

The Company had income tax expense of ~~$85,000~~$514,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2020 at an effective tax rate of ~~20.6%~~21.0% compared to income tax expense of ~~$183,000~~$460,000 with an effective tax rate of ~~21.0%~~21.9% in the comparable 2019 period. 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. In 2020, the effective tax rate decreased slightly due to more impact from tax-free instruments.

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 decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan 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 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 $172,000 to the reserve that was not present prior to June 30, 2020. 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 from March 31, 2020 to June 30, 2020.

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 ~~March 31,~~June 30, 2020, the levels of our impaired loans, which includes all loans in ~~nonaccrual~~non-accrual status, TDRs, and other loans deemed by management to be impaired, were ~~$10.9~~$8.6 million, compared to $6.8 million at December 31, 2019, a net increase of ~~$4.1~~$1.8 million. The increase is related to one large relationship moving into ~~nonaccrual~~non-accrual status during the first quarter of 2020 and one large relationship ~~modifying~~being modified as a TDR in the ~~first~~second quarter of 2020. Total ~~nonaccrual~~non-accrual loans, which are a component of impaired loans, increased from $2.9 million at December 31, 2019 to ~~$4.1~~$3.9 million at ~~March 31,~~June 30, 2020. During the first ~~three~~six months of 2020, ~~six~~five additional loans totaling ~~$4.2~~$2.0 million were added to impaired ~~loans.~~loans; however, two loans totaling $136,000 were closed. That was offset by net pay downs of ~~$57,000.~~$112,000.

The allowance, expressed as a percentage of gross loans held for investment, increased ~~sixteen~~twenty basis points from 0.55% at December 31, 2019 to ~~0.71%~~0.75% at ~~March 31,~~June 30, 2020. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.52% at December 31, 2019 and ~~0.69%~~0.74% at ~~March 31,~~June 30, 2020. The increase is attributable to the ~~significant~~model adjustments discussed above allowing additional economic factors to increase ~~in market volatility during March 2020~~qualitative factors related to the worldwide COVID-19 ~~outbreak worldwide.~~outbreak. This outbreak, which resulted in many businesses closing and staff layoffs, led management to increase the ~~discretionary fund~~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 ~~1.44%~~1.53% for the same periods, mainly due to the two large relationships totaling ~~$3.8~~$1.7 million that were deemed impaired during the first ~~quarter~~six months of 2020, though little reserve is recognized based on the ~~value of expected collateral if the loans is foreclosed upon.~~net realizable value. 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.~~ 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 the first ~~quarter,~~six months of 2020, the average effective credit score of the portfolio, excluding loans in default, declined slightly from 770 to 768. The probability of default associated with each credit score is a major driver in the allowance for loan losses.

The ratio of nonperforming loans, which consist of ~~nonaccrual~~non-accrual loans and loans past due 90 days and still accruing, to total loans increased from 0.82% at December 31, 2019, to ~~1.12%~~0.87% at ~~March 31,~~June 30, 2020, related to the large impaired relationship added in the first quarter, for which the Company believes it is sufficiently collateralized.

As of ~~March 31,~~June 30, 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 ~~$56,000~~$135,000 during the first ~~three~~six months of 2020. The Company sold ~~two~~three pieces of foreclosed property totaling ~~$35,000,~~$130,000, realizing a gain of ~~$42,000.~~$53,000. The Company had $21,000 in write-downs for the period ~~ending March 31,~~ended June 30, 2020. There were no loans foreclosed on during the first ~~three~~six months of 2020.

Troubled debt restructured loans at ~~March 31,~~June 30, 2020 totaled ~~$6.9~~$4.8 million compared to $3.9 million at December 31, 2019 and are included in impaired loans. The ~~significant~~ increase is related to one relationship of ~~$2.7 million.~~$650,000 added. At ~~March 31,~~June 30, 2020, there were two troubled debt restructured loans in ~~nonaccrual~~non-accrual status, which had a balance of ~~$72,000.~~$69,000.

As discussed in Note 8 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 ~~March 31,~~June 30, 2020, the Company had ~~modified 61~~current outstanding loan portfolio modifications of 179 COVID-19 impacted loans for ~~$26.6 million of outstanding loans in the portfolio. These loans are not considered non-accrual status or TDRs.~~$55.3 million.

The following table shows the comparison of nonperforming assets at ~~March 31,~~June 30, 2020 to December 31, 2019:

	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Nonperforming assets:
Loans past due 90 days or more	$	—		$	—		$	—		$	—
Nonaccrual loans		4,128			2,922
Non-accrual loans								3,939			2,922
Other real estate owned		438			494			359			494
Total nonperforming assets	$	4,566		$	3,416		$	4,298		$	3,416

Allowance for loans losses	$	2,627		$	1,981		$	3,426		$	1,981
Nonperforming loans to total loans		1.12	%		0.82	%		0.87	%		0.82	%
Allowance for loan losses to total loans		0.71	%		0.55	%		0.75	%		0.55	%
Nonperforming assets to total assets		0.68	%		0.52	%		0.57	%		0.52	%
Allowance for loan losses to nonperforming loans		63.64	%		67.80	%		86.98	%		67.80	%

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The

Company and its subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating ~~$35~~$28 million at ~~March 31,~~June 30, 2020, with available credit of ~~$35~~$28 million; established borrowing relationships with the

Federal Home Loan Bank, with available credit of ~~$48.4~~$54.0 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of ~~$23.4~~$24.5 million and the issuance of commercial paper. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A., during the first quarter of 2020. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of June 30, 2020, we had $2.0 million that had not been extended and remained available for use on the line of credit. The Company has also previously secured long-term debt from other sources. Total outstanding debt from these sources included $10.0 million of junior subordinated debt at both ~~March 31,~~June 30, 2020 and December 31, 2019.

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

The Company continues to maintain capital ratios that support its asset growth. The federal bank regulatory agencies have implemented regulatory capital rules known as “Basel III.” The Basel III rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. There is also a capital conservation buffer that requires banks to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

The Basel III rules began to phase in for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements effective on January 1, 2019. ~~Pursuant to~~As of June 30, 2020, the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at theCompany’s subsidiary bank ~~level. As of March 31, 2020, the Bank continues~~continued to exceed minimum capital standards and ~~remain~~remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At ~~March 31,~~June 30, 2020, the Company had $10.0 million in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.

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

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through ~~March 31,~~June 30, 2020 and have no current plans to do so.

The timing and amount of our contractual obligations has not changed materially since our 2019 Annual Report to Shareholders, ~~December 31, 2019,~~which is filed as Exhibit 13 ~~with~~to our 2019 Annual Report on Form 10-K.

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act (“Exchange Act”) Rule 13a-15.

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be

disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the ~~first~~second quarter of 2020. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

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

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended ~~March 31,~~June 30, 2020.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NORTH CAROLINA		56-1814206
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

132 NORTH FIRST STREET ALBEMARLE, NORTH CAROLINA		28001
(Address of Principal Executive Offices)		(Zip Code)

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of ~~March 31,~~June 30, 2020 and December 31, 2019	3

	Consolidated Statements of Income for the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	4

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	6

	Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2020 and 2019	7

	Notes to Consolidated Financial Statements	8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2829

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	3336

Item 4 -	Controls and Procedures	3336

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	3437

Item 1A -	Risk Factors	3437

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	3437

Item 3 -	Defaults Upon Senior Securities	3437

Item 4 -	Mine Safety Disclosures	3437

Item 5 -	Other Information	3437

Item 6 -	Exhibits	3538

	Signatures	3639

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

	For the six months ended June 30, 2020
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Commercial		2	$	691	$	691
SBA Paycheck Protection Program (PPP)		—		—		—
Real estate - commercial		1		829		829
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		2		335		335
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

Total		5	$	1,855	$	1,855

	For the six months ended June 30, 2019
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Commercial		—	$	—	$	—
Real estate - commercial		1		1,629		857
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		3		217		198
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

Total		4	$	1,846	$	1,055

~~March 31,~~June 30, 2020
	Valuation Technique	Unobservable Input	General Range
Nonrecurring measurements:

Impaired loans	Discounted appraisals	Collateral discounts and Estimated costs to sell	0 – 25%
	Discounted cash flows	Discount ~~Rate~~rates	4%-8.75%

OREO	Discounted appraisals	Collateral discounts and Estimated costs to sell	0 – 10%

	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)		(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans
January 1, 2020 Through January 31, 2020		—	$	—		—	$	—
February 1, 2020 Through February 29, 2020		—	$	—		—	$	—
March 1, 2020 Through March 31, 2020		111,338	$	5.50		—	$	—
Total		111,338	$	5.50		—	$	—

Exhibit Number		Description of Exhibit


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended ~~March 31,~~June 30, 2020, in XBRL (eXtensible Business Reporting Language) (filed herewith)

		UWHARRIE CAPITAL CORP
		(Registrant)

Date:	~~May 5,~~August 4, 2020	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date:	~~May 5,~~August 4, 2020	By:	/s/ R. David Beaver, III
		R. David Beaver, III
		Principal Financial Officer