UWHARRIE CAPITAL CORP - FORM 10-K - EX-13 - 2009 ANNUAL REPORT TO SHAREHOLDERS

Attached files

file	filename
10-K - FORM 10-K - UWHARRIE CAPITAL CORP	d10k.htm
EX-23 - CONSENT OF DIXON HUGHES PLLC - UWHARRIE CAPITAL CORP	dex23.htm
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - UWHARRIE CAPITAL CORP	dex32.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - UWHARRIE CAPITAL CORP	dex21.htm
EX-99.(B) - CERTIFICATE PURSUANT TO EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 - UWHARRIE CAPITAL CORP	dex99b.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - UWHARRIE CAPITAL CORP	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - UWHARRIE CAPITAL CORP	dex312.htm
EX-99.(C) - CERTIFICATE PURSUANT TO EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 - UWHARRIE CAPITAL CORP	dex99c.htm

Exhibit 13

Uwharrie Capital Corp

2009

ANNUAL REPORT TO SHAREHOLDERS

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was organized on July 1, 1993 to become the bank holding company for the Bank of Stanly (“Stanly”), a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

Stanly engages in retail and commercial banking, with six banking offices in Stanly County. Stanly provides a wide range of banking services including deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes, and electronic banking services.

On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provides financial services to customers through one banking office in Anson County.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Stanly to begin its operation. Cabarrus operates as a commercial bank and provides a full range of banking services.

The Company and its subsidiaries are located in Stanly County, Anson County and Cabarrus County. However, the Company intends to prudently expand its service area to include the entire Uwharrie Lakes Region of North Carolina.

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

Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance^®) is a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for a partnership with UVEST Financial Services, Inc., securities and insurance products are offered including fixed annuities, long-term care, and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc. and the Novus Group, Inc. as well as Medicare supplement products.

The Strategic Alliance Corporation. Member FINRA/SIPC.

Securities and insurance products are offered by, and Financial Consultants are registered with UVEST Financial Services, member FINRA/SIPC. UVEST, Strategic Investment Group and Uwharrie Capital Corp affiliates are independent entities. Securities and/or insurance products are not FDIC insured, are not deposits or other obligations of any depository institution, are not guaranteed by any depository institution and are subject to investment risks, including possible loss of the principal amount invested.

Bank of Stanly, Member FDIC, Equal Housing Lender.

Anson Bank & Trust Co., Member FDIC, Equal Housing Lender.

Cabarrus Bank & Trust Company, Member FDIC, Equal Housing Lender.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights


*(Dollars in thousands except per share amounts)*	2009			2008			Percent Increase (Decrease)

For the year:
Net income	$	690		$	2,029		(65.99	)%
Net income available to common shareholders	$	48		$	2,016		(97.62	)%
Basic net income per common share (1)	$	0.01		$	0.27		(94.81	)%
Diluted net income per common share (1)	$	0.01		$	0.27		(96.30	)%

Weighted average common shares outstanding (diluted)		7,474,140			7,520,484		(0.62	)%

At year-end:
Total assets	$	477,846		$	452,468		5.61	%
Total earning assets		436,012			422,709		3.15	%
Loans held for investment		353,729			340,830		3.78	%
Total interest-bearing liabilities		385,433			362,346		6.37	%
Shareholders’ equity		44,024			41,233		6.77	%
Book value per common share (1)	$	4.47		$	4.11		8.76	%

Averages for the year:
Total assets	$	471,729		$	422,857		11.56	%
Total earning assets		434,218			393,769		10.27	%
Loans held for investment		346,976			335,791		3.33	%
Total interest-bearing liabilities		378,411			342,341		10.54	%
Shareholders’ equity		43,182			32,245		33.92	%

Financial ratios (in percentage):
Return on average assets		0.15	%		0.48	%
Return on average shareholders’ equity		1.60	%		6.29	%
Average equity to average assets		9.15	%		7.63	%
Net interest margin (fully tax equivalent basis)		4.12	%		4.13	%
Allowance as % of loans at year-end		1.49	%		1.28	%
Allowance as % of nonperforming loans		93.71	%		111.87	%
Nonperforming loans to total loans		1.59	%		1.14	%
Nonperforming assets to total assets		1.89	%		1.48	%
Net loan charge-offs (recoveries) to average loans		0.24	%		0.04	%

(1)	Net income per share, book value per share, and shares outstanding at year-end have been adjusted to reflect the 3% stock dividends in 2008.

Market for the Company’s Common Stock and Related Security Holder Matters

It is the philosophy of Uwharrie Capital Corp to promote a strong base of local shareholders. While bid and asked prices for the Company’s common stock are quoted on the Over the Counter Bulletin Board under the symbol UWHR, trading is sporadic with trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.

The Board of Directors adopts a dividend policy on an annual basis. For 2009, Uwharrie Capital Corp did not declare a dividend. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

The following graph compares (i) the yearly change in the cumulative total shareholder return on the Company’s common stock with (ii) the cumulative return of The Carson Medlin Company Independent Bank Index, and (iii) the Nasdaq Composite. The graph assumes that the value of an investment in the Company’s common stock and in each index was $100 on December 31, 2004, and that all dividends were reinvested. The performance shown in the graph represents past performance and should not be considered the indication of future performance.

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

LOGO

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective the quarter ended June 30, 2009 the Company changed its method of accounting for other-than temporary impairment of debt securities as a result of adopting new accounting guidance.

LOGO

Southern Pines, North Carolina

March 23, 2010

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008


	2009			2008
	(dollars in thousands)
ASSETS
Cash and due from banks	$	7,521		$	2,931
Interest-earning deposits with banks		3,338			10,353
Securities available for sale, at fair value		76,317			68,835
Loans held for sale		2,628			2,691
Loans:
Loans held for investment		353,729			340,830
Less allowance for loan losses		(5,276	)		(4,361	)

Net loans held for investment		348,453			336,469

Premises and equipment, net		13,646			11,128
Interest receivable		2,077			2,027
Federal Home Loan Bank stock		3,201			2,284
Bank owned life insurance		5,714			5,511
Goodwill		987			987
Other real estate owned		3,419			2,816
Prepaid assets		2,617			696
Other assets		7,928			5,740

Total assets	$	477,846		$	452,468


LIABILITIES
Deposits:
Demand noninterest-bearing	$	44,924		$	46,032
Interest checking and money market accounts		137,708			117,325
Savings deposits		32,120			26,360
Time deposits, $100,000 and over		64,736			63,321
Other time deposits		97,286			100,589

Total deposits		376,774			353,627

Short-term borrowed funds		26,940			22,249
Long-term debt		26,643			32,502
Interest payable		396			502
Other liabilities		3,069			2,355

Total liabilities		433,822			411,235


Off balance sheet items, commitments and contingencies (Note 12)

SHAREHOLDERS’ EQUITY
Preferred stock, no par value: 10,000,000 shares authorized;
10,000 shares of series A issued and outstanding		10,000			10,000
500 shares of series B issued and outstanding		500			500
Discount on preferred stock		(400	)		(500	)
Common stock, $1.25 par value: 20,000,000 shares authorized; 7,593,929 shares issued and outstanding		9,492			9,492
Additional paid-in capital plus stock option surplus		14,030			14,019
Unearned ESOP compensation		(667	)		(736	)
Undivided profits		10,056			10,008
Accumulated other comprehensive income (loss)		1,013			(1,550	)

Total shareholders’ equity		44,024			41,233

Total liabilities and shareholders’ equity	$	477,846		$	452,468

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2009, 2008 and 2007


	2009			2008			2007
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	21,246		$	22,780		$	23,916
Investment securities:
US Treasury		12			73			98
US Government agencies and corporations		3,106			1,853			1,401
State and political subdivisions		632			689			633
Other		—			84			128
Interest-earning deposits with banks and federal funds sold		66			85			733

Total interest income		25,062			25,564			26,909


Interest Expense
Interest checking and money market accounts		838			1,357			2,550
Savings deposits		255			301			526
Time deposits $100,000 and over		1,980			2,453			2,316
Other time deposits		2,836			3,828			4,138
Short-term borrowed funds		316			529			1,128
Long-term debt		1,472			1,360			1,218

Total interest expense		7,697			9,828			11,876

Net interest income		17,365			15,736			15,033
Provision for loan losses		1,732			969			15

Net interest income after provision for loan losses		15,633			14,767			15,018


Noninterest Income
Service charges on deposit accounts		2,360			2,238			2,188
Other service fees and commissions		2,273			2,777			3,097
Loss on sale of securities		(711	)		—			(76	)
Loss on nonmarketable securities		(172	)		—			—
Loss on securities with other-than-temporary impairment		(1,807	)		(158	)		—
Portion of loss recognized in other comprehensive income		—			—			—

Net impairment recognized in income		(1,807	)		(158	)		—
Income from mortgage loan sales		3,436			1,208			957
Other income		445			532			424

Total noninterest income		5,824			6,597			6,590


Noninterest Expense
Salaries and employee benefits		11,527			10,637			10,156
Net occupancy expense		1,071			987			871
Equipment expense		702			645			598
Data processing costs		792			789			742
Professional fees and services		968			687			720
Marketing and donations		746			682			639
Electronic banking expense		728			792			706
Software amortization and maintenance		470			455			448
FDIC insurance		958			128			66
Other noninterest expense		2,968			2,729			2,416

Total noninterest expense		20,930			18,531			17,362

Income before income taxes		527			2,833			4,246
Income taxes		(163	)		804			1,287


Net income	$	690		$	2,029		$	2,959


Net income	$	690		$	2,029		$	2,959
Dividends on preferred stock		(642	)		(13	)		—

Net Income available to common shareholders	$	48		$	2,016		$	2,959

Net income per common share
Basic	$	0.01		$	0.27		$	0.39

Diluted	$	0.01		$	0.27		$	0.39

Weighted average common shares outstanding
Basic		7,474,140			7,482,488			7,603,494
Diluted		7,474,140			7,520,484			7,706,832

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2009, 2008 and 2007


	2009			2008			2007
	(in thousands)

Net Income	$	690		$	2,029		$	2,959


Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		1,637			(3,315	)		275
Related tax effect		(621	)		1,281			(105	)

Reclassification of losses recognized in net income		711			—			76
Related tax effect		(274	)		—			(29	)

Reclassification of losses for which credit-related portion other-than-temporary impairment was recognized in net income		1,807			158			—
Related tax effect		(697	)		(61	)		—


Total other comprehensive income (loss)		2,563			(1,937	)		217


Comprehensive income	$	3,253		$	92		$	3,176

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2009, 2008 and 2007


	Number Common Shares Issued		Preferred Stock Series A		Preferred Stock Series B		Discount on Preferred Stock			Common Stock			Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits			Accumulated Other Comprehensive Income(Loss)			Total
	(in thousands, except share data)

Balance, December 31, 2006	7,423,550		$	—	$	—	$	—		$	9,279		$	13,541		$	(859	)	$	7,502		$	170		$	29,633
Net income	—			—		—		—			—			—			—			2,959			—			2,959
Other comprehensive income	—			—		—		—			—			—			—			—			217			217
Release of ESOP shares	—			—		—		—			—			31			59			—			—			90
Common stock issued pursuant to:
3% stock dividend	216,062			—		—		—			270			916			—			(1,186	)		—			—
Stock options exercised	12,764			—		—		—			16			20			—			—			—			36
Tax benefit of stock options exercised	—			—		—		—			—			3			—			—			—			3
Repurchase of common stock	(237,669	)		—		—		—			(297	)		(1,107	)		—			—			—			(1,404	)
Cash paid fraction shares	—			—		—		—			—			—			—			(9	)		—			(9	)
Stock compensation expense	—			—		—		—			—			49			—			—			—			49

Balance, December 31, 2007	7,414,707			—		—		—			9,268			13,453			(800	)		9,266			387			31,574

Net income	—			—		—		—			—			—			—			2,029			—			2,029
Other comprehensive income	—			—		—		—			—			—			—			—			(1,937	)		(1,937	)
Release of ESOP shares	—			—		—		—			—			14			64			—			—			78
Common stock issued pursuant to:
3% stock dividend	220,738			—		—		—			276			718			—			(994	)		—			—
Stock options exercised	69,742			—		—		—			87			214			—			—			—			301
Tax benefit of stock options exercised	—			—		—		—			—			26			—			—			—			26
Repurchase of common stock	(111,258	)		—		—		—			(139	)		(432	)		—			—			—			(571	)
Cash paid fractional shares	—			—		—		—			—			—			—			(7	)		—			(7	)
Stock compensation expense	—			—		—		—			—			26			—			—			—			26
Adjustment to initially apply ASC 715-60	—			—		—		—			—			—			—			(273	)		—			(273	)
Issue series A preferred stock to the Treasury	—			10,000		—		—			—			—			—			—			—			10,000
Issue series B preferred stock to the Treasury	—			—		500		—			—			—			—			—			—			500
Record Series B warrant expense	—			—		—		(500	)		—			—			—			—			—			(500	)
Record preferred stock dividend	—			—		—		—			—			—			—			(13	)		—			(13	)

Balance, December 31, 2008	7,593,929			10,000		500		(500	)		9,492			14,019			(736	)		10,008			(1,550	)		41,233

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2009, 2008 and 2007


	Number Common Shares Issued	Preferred Stock Series A		Preferred Stock Series B		Discount on Preferred Stock			Common Stock		Additional Paid-in Capital		Unearned ESOP Compensation			Undivided Profits			Accumulated Other Comprehensive Income(Loss)			Total
	(in thousands, except share data)

Balance, December 31, 2008	7,593,929	$	10,000	$	500	$	(500	)	$	9,492	$	14,019	$	(736	)	$	10,008		$	(1,550	)	$	41,233
Net income	—		—		—		—			—		—		—			690			—			690
Other comprehensive income	—		—		—		—			—		—		—			—			2,563			2,563
Release of ESOP shares	—		—		—		—			—		—		69			—			—			69
Stock compensation expense	—		—		—		—			—		11		—			—			—			11
Record preferred stock dividend and discount accretion	—		—		—		100			—		—		—			(642	)		—			(542	)


Balance, December 31, 2009	7,593,929	$	10,000	$	500	$	(400	)	$	9,492	$	14,030	$	(667	)	$	10,056		$	1,013		$	44,024

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2009, 2008 and 2007


	2009			2008			2007
Cash flows from operating activities
Net income	$	690		$	2,029		$	2,959
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation		780			676			625
Net amortization of security premiums/discounts		134			(202	)		(220	)
Impairment of securities available for sale		1,807			158			—
Net amortization of mortgage servicing rights		868			471			407
Impairment of foreclosed real estate		78			28			—
Provision for loan losses		1,732			969			15
Deferred income taxes		(737	)		(728	)		205
Stock compensation		11			26			49
Net realized loss on sales / calls available for sale securities		711			—			76
Income from mortgage loan sales		(3,436	)		(1,208	)		(957	)
Proceeds from sales of loans held for sale		144,761			55,198			45,603
Origination of loans held for sale		(142,727	)		(54,328	)		(43,748	)
(Gain) loss on sale of premises, equipment and other assets		(1	)		5			(26	)
Loss on nonmarketable securities		172			—			—
Increase in cash surrender value of life insurance		(203	)		(193	)		(185	)
Loss on sales of foreclosed real estate		36			41			2
Release of ESOP Shares		69			78			90
Net change in interest receivable		(50	)		28			(280	)
Net change in other assets		(3,652	)		83			(866	)
Net change in interest payable		(106	)		(94	)		93
Net change in other liabilities		714			584			302

Net cash provided by operating activities		1,651			3,621			4,144


Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		30,353			14,386			10,382
Purchase of securities available for sale		(36,208	)		(35,329	)		(23,744	)
Net increase in loans		(15,598	)		(21,837	)		(33,588	)
Proceeds from sale of premises, equipment and other assets		1			—			87
Purchase of premises and equipment		(3,298	)		(3,058	)		(758	)
Proceeds from sales of foreclosed real estate		1,243			182			98
Investment in other assets		(1,089	)		(569	)		—
Net increase in Federal Home Loan Bank stock		(917	)		(147	)		(157	)

Net cash used by investing activities		(25,513	)		(46,372	)		(47,680	)


Cash flows from financing activities
Net increase in deposit accounts		23,147			28,970			15,057
Net increase (decrease) in short-term borrowed funds		4,691			(9,679	)		18,888
Net increase (decrease) in long-term debt		(5,859	)		3,392			(7,598	)
Net proceeds from issuance of junior subordinated debt		—			7,419			—
Repurchases of common stock		—			(571	)		(1,404	)
Net proceeds from issuance of preferred stock		—			10,000			—
Net proceeds from issuance of common stock		—			301			36
Tax benefit of stock options exercised		—			26			3
Dividend and discount accretion on preferred stock		(542	)		(13	)		—
Cash paid for fractional shares		—			(7	)		(9	)

Net cash provided by financing activities		21,437			39,838			24,973


Decrease in cash and cash equivalents		(2,425	)		(2,913	)		(18,563	)
Cash and cash equivalents, beginning of period		13,284			16,197			34,760

Cash and cash equivalents, end of period	$	10,859		$	13,284		$	16,197


Supplemental disclosures of cash flow information
Interest paid	$	7,802		$	9,922		$	11,783
Income taxes paid		1,558			1,596			1,311
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		2,563			(1,937	)		217
Loans transferred to foreclosed real estate		1,882			2,876			60
Mortgage servicing rights capitalized		1,465			563			331
Preferred stock dividend accrued		(68	)		(13	)		—
ASC 715-60 charged to retained earnings		—			(273	)		—

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies

Nature of Business

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

Stanly was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984 in Albemarle, North Carolina. Deposits with Stanly are insured by the Federal Deposit Insurance Corporation (“FDIC”). Stanly is under regulation of the Federal Reserve, FDIC and the North Carolina State Banking Commission. Through its six branch locations in Stanly County, Stanly provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

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

The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1999 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission.

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

On August 4, 2000, Stanly acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company.

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Stanly, Anson, Cabarrus, SIA and their subsidiaries, BOS Agency, Strategic Alliance and Gateway. All significant intercompany transactions and balances have been eliminated in consolidation.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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.

Cash and Cash Equivalents

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

Investment Securities Held To Maturity

Investment securities classified as held to maturity are debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Declines in the fair value of individual held to maturity securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. The Company had no securities held to maturity at December 31, 2009 and 2008.

Investment Securities Available for Sale

Investment securities available for sale consist of bonds and notes not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Loans Held for Sale

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

Loans

The Company grants mortgage, commercial and consumer loans to customers. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

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

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

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

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, residential and other loans for impairment disclosures.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Servicing Rights

The Company capitalizes servicing rights when loans are either securitized or sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to and over the estimated period of net servicing revenues. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance.

Transfers of Financial Assets

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

Foreclosed Real Estate

Real estate properties acquired through foreclosure or other proceedings are initially recorded at fair value upon foreclosure, establishing a new cost basis. After foreclosure, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to other expenses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value.

Premises and Equipment

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

Federal Home Loan Bank Stock

As a requirement for membership, the banks invest in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value approximates cost and that this investment was not impaired.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Goodwill

Goodwill resulted from the 2000 acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. Goodwill is evaluated for impairment annually or more frequently if circumstances indicate potential impairment.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.

Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Fair Value of Financial Instruments

The Company adopted the provisions of Accounting Standards Codification ASC 820 Fair Value Measurements and Disclosures and ASC 825, Financial Instruments on January 1, 2008.

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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 loans held for sale, which are carried at the lower of cost or market; 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; foreclosed real estate, which is carried at lower of cost or fair market value and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

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 in accordance with ASC 310, Receivables, Loan and Debt Securities. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Comprehensive Income

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.

As of December 31, 2009 and December 31, 2008, total accumulated other comprehensive income (loss) was $1.0 million and $(1.6) million, respectively. The components of accumulated other comprehensive income at December 31, 2009 included $239,926 of unrealized gains and temporary unrealized losses net of tax, and non credit losses on five other than temporarily impaired investments of $(772,722) net of tax. Accumulated other comprehensive income at December 31, 2008 consisted of unrealized gains and temporary unrealized losses of $(1.6) million net of tax.

Earnings per Common Share

The Company issued 3% stock dividends in 2008 and 2007. There was not a stock dividend in 2009. All references in these consolidated financial statements to earnings per common share and weighted average common and common equivalent shares outstanding have been adjusted for the effect of these stock dividends. In 2009 and 2008 there were 280,715 and 189,866 options outstanding that were anti-dilutive, respectively. There were not any anti-dilutive stock options outstanding in 2007.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The ESOP effect is the yearly average of the unallocated ESOP shares.

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


	2009		2008		2007

Weighted average number of common shares used in computing basic net income per common share	7,593,969		7,618,913		7,753,837

Effect of ESOP shares	(119,829	)	(136,425	)	(150,343	)


Adjusted weighted average number of common shares used in computing basic net income per common share	7,474,140		7,482,488		7,603,494

Effect of dilutive stock options	—		37,996		103,338


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share	7,474,140		7,520,484		7,706,832

Recent Accounting Pronouncements

ASC 105

In June 2009, the Financial Accounting Standards Board issued Accounting Standards Codification ASC 105. The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles as the single source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. The Codification reorganizes all previous GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. All existing standards that were used to create the Codification have been superseded, replacing the previous references to specific Statements of Financial Accounting Standards (SFAS) with numbers used in the Codification’s structural organization. The guidance is effective for interim and annual periods ending after September 15, 2009. After September 15, only one level of authoritative GAAP exists, other than guidance issued by the Securities and Exchange Commission (SEC). All other accounting literature excluded from the Codification is considered non-authoritative. The adoption of the Codification does not have a material impact on the Company’s consolidated financial statements.

ASC 815

In March of 2008, the Financial Accounting Standards Board issued Accounting Standards Codification 815 (“ASC 815”), Derivative and Hedging. ASC 815 amends and expands the disclosure requirement for derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of the derivative instrument’s purpose,

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

how it is accounted for, and its impact on the financial statements. The adoption of ASC 815 on January 1, 2009 did not have a material effect on the Company’s consolidated financial statements.

ASC 855

In May 2009, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC 855”), Subsequent Events. The guidance establishes general standards of accounting for and disclosure of subsequent events. Subsequent events are events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is effective for interim or annual periods ending after June 15, 2009. The adoption of this guidance was not material to the Company’s consolidated financial statements.

FSP EITF 99-20-1

On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position, Emerging Issues Task Force (EITF) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. FSP EITF 99-20-1 addresses certain practice issues in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” by making its other-than-temporary impairment assessment guidance consistent with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” FSP EITF 99-20-1 removes the reference to the consideration of a market participant’s estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that there has been an adverse change in estimated cash flows, other-than-temporary impairment is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the Financial Accounting Standards Board issued the following three FASB Staff Positions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

ASC 820

ASC 820, “Fair Value and Disclosures,” provide additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have decreased significantly. ASC 820 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of ASC 820 are effective for the Company’s interim period ending on June 30, 2009.

ASC 825

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of ASC 825 are effective for the Company’s interim period ending on June 30, 2009. As ASC 825 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of ASC 825 did not have a material effect on the Company’s statement of operations and balance sheet.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

ASC 320

ASC 320, “Investments, Debt Equity Securities” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted this as of June 30, 2009 and it did not have a material effect on the Company’s statement of operations and balance sheet.

SAB 111

The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the Staff’s previous views related to equity securities; however, debt securities are excluded from its scope. The SAB provides that “other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’s financial position.

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.

Reclassification

Certain amounts in the 2008 and 2007 financial statements have been reclassified to conform to the 2009 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities

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


December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
			(dollars in thousands)
U.S. Treasury	$	3,024	$	—	$	5	$	3,019
U.S. Government agencies		20,736		246		11		20,971
Mortgage-backed securities and CMO’s		34,186		1,056		—		35,242
Private label CMO’s		7,468		117		85		7,500
State and political subdivisions		9,276		309		—		9,585

Total securities available for sale	$	74,690	$	1,728	$	101	$	76,317


December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
			(dollars in thousands)
U.S. Government agencies	$	10,469	$	229	$	55	$	10,643
Mortgage-backed securities and CMO’s		33,149		691		225		33,615
Private label CMO’s		11,351		—		3,570		7,781
State and political subdivisions		16,396		417		17		16,796

Total securities available for sale	$	71,365	$	1,337	$	3,867	$	68,835

At December 31, 2009 and 2008, the Company owned Federal Reserve stock reported at cost of $778,850 and $568,850 respectively and is included in other assets. Also at December 31, 2009 and 2008, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.2 million and $2.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks.

Results from sales and calls of securities available for sale for the years ended December 31, 2009, 2008 and 2007 are as follows:


	2009			2008		2007
	(dollars in thousands)
Gross proceeds from sales and calls	$	9,535		$	—	$	4,643


Realized gains from sales	$	219		$	—	$	—
Realized losses from sales		(930	)		—		(76	)

Net realized gains (losses)	$	(711	)	$	—	$	(76	)

At December 31, 2009, 2008 and 2007 securities available for sale with a carrying amount of $11.4 million, $13.2 million and $15.2 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline in a volatile market and are in no way a reflection of the quality of the investments. At December 31, 2009, the unrealized losses related to three U.S. Treasury notes, three U.S. Government Agencies and five mortgage backed securities and collateralized mortgage obligations “CMOs”.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)


	Less than 12 Months				12 Months or More				Total
December 31, 2009	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	3,019	$	5	$	—	$	—	$	3,019	$	5
U.S. Gov’t agencies		10,327		11		—		—		10,327		11
Mortgage-backed securities and CMO’s		—		—		134		—		134		—
Private label CMO’s		—		—		1,625		85		1,625		85
State and political subdivisions		—		—		—		—		—		—

	$	13,346	$	16	$	1,759	$	85	$	15,105	$	101


Other than Temporary Impairment
Private label CMO’s	$	—	$	—	$	3,667	$	—	$	3,667	$	—

	$	—	$	—	$	3,667	$	—	$	3,667	$	—


	Less than 12 Months				12 Months or More				Total
December 31, 2008	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Gov’t agencies	$	3,010	$	55	$	—	$	—	$	3,010	$	55
Mortgage-backed securities and CMO’s		3,996		212		633		12		4,629		224
Private label CMO’s		10,506		3,076		657		66		11,163		3,142
State and political subdivisions		2,648		17		—		—		2,648		17

	$	20,160	$	3,360	$	1,290	$	78	$	21,450	$	3,438


Other than Temporary Impairment
Private label CMO’s	$	188	$	429	$	—	$	—	$	188	$	429

	$	188	$	429	$	—	$	—	$	188	$	429

The Company routinely conducts reviews to identify and evaluate each investment security to determine whether OTTI has occurred using several economic models. To determine if the unrealized loss is other-than-temporary, the Company projects total estimated defaults of the underlying troubled and non performing assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given position will be subject to a write-down, loss or decline in yield, the Company records the expected credit loss as a charge to earnings. In addition, the Company estimates the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting bond collateral.

Based on these evaluations, the Company determined that five private label collateralized mortgage obligations were other-than-temporarily impairment at December 31, 2009, and reduced the carrying value of these instruments to fair value through a $1.8 million charge to earnings. These instruments were subsequently sold at a further loss of $93,621 during the first quarter of 2010.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 – Investment Securities (Continued)

The following table summarizes cumulative credit other-than-temporary impairment losses recognized on debt securities held by the Company:


	2009
	(dollars in thousands)
Balance, beginning of the period	$	—
Impairment losses recognized during the year		1,807
Realized losses from sales		(124	)


Balance, end of year	$	1,683

As of December 31, 2009 there are no unrealized loss components for these impaired securities and accumulated other comprehensive income.

Note 3 – Loans Held for Investment

The composition of net loans held for investment as of December 31, 2009 and 2008 is as follows:


	2009			2008
	(dollars in thousands)
Commercial	$	51,723		$	45,470
Real estate - construction		44,976			50,661
Real estate - residential		144,154			139,346
Real estate - commercial		95,938			89,561
Consumer		16,628			15,499
Other		172			121

		353,591			340,658
Less:
Allowance for loan losses		(5,276	)		(4,361	)
Deferred loan (fees) costs, net		138			172


Loans held for investment, net	$	348,453		$	336,469

Although the subsidiary banks’ loan portfolios are diversified, there is a concentration of mortgage real estate loans, primarily one to four family residential mortgage loans, which represent 40.77% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, to finance manufacturing buildings, shopping center locations, commercial land development, commercial buildings and equipment that comprise 27.13% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $24.1 million and $12.5 million at December 31, 2009 and 2008, respectively. The nonaccrual status of these loans had the effect of reducing net income by $246,395 in 2009 and $93,750 in 2008. Of the $24.1 million in impaired loans at December 31, 2009, $16.5 million carried allowances totaling $3.0 million while $7.6 million were evaluated and required no specific allowance. Of the $12.5 million in impaired loans at December 31, 2008, $9.0 million carried allowances totaling $2.3 million while $3.5 million required no specific allowance. There were credit card loans 90 days past due and still accruing of $16,635 and $2,710 at December 31, 2009 and 2008, respectively.

Restructured loans at December 31, 2009 totaled $2.4 million of which $2.3 million are included in impaired loans above.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Loans Held for Investment (Continued)

The carrying value of foreclosed properties held as other real estate was $3.4 million and $2.8 million at December 31, 2009 and 2008, respectively.

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

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007 are presented below:


	2009			2008			2007
	(dollars in thousands)
Balance, beginning of year	$	4,361		$	3,510		$	3,171
Charge-offs		(871	)		(288	)		(224	)
Recoveries		54			170			548
Provision charged against income		1,732			969			15


Balance, end of year	$	5,276		$	4,361		$	3,510

Note 5 – Servicing Assets

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $289 million and $228 million at December 31, 2009 and 2008, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:


	2009			2008			2007
	(dollars in thousands)

Beginning of year mortgage servicing rights:	$	1,293		$	1,321		$	1,244
Amounts capitalized		1,465			563			484
Amortization		(868	)		(471	)		(407	)
Impairment		—			(120	)		—


End of year	$	1,890		$	1,293		$	1,321

Amortization expense is estimated as follows:


	Year ending December 31,
	(dollars in thousands)

2010	$	305
2011		264
2012		224
2013		183
2014		142
Thereafter		772

Total	$	1,890

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 – Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2009 and 2008 are listed below:


	2009		2008
	(dollars in thousands)

Land	$	4,081	$	3,207
Building and improvements		10,012		8,402
Furniture and equipment		5,598		5,391

		19,691		17,000
Less accumulated depreciation		6,045		5,872

Total	$	13,646	$	11,128

Note 7 – Leases

The Company’s subsidiary, Bank of Stanly, had a noncancelable operating lease for a branch location in Albemarle that expired in 2008, with annual rental payments of $18,575. The lease has one five year renewal option at the expiration of the initial term. Bank of Stanly elected to go into a month to month lease and entered into an agreement to purchase the building for $300,000 in 2009. The lease payment remained the same during the finalization of the purchase. Bank of Stanly has also entered into a noncancelable operating lease for a branch location in Locust that expires in 2010 with annual rental payments of $41,856. The Company’s subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $59,850. The lease has two five year renewal options at the expiration of the initial term.

Future minimum lease payments under these leases for years subsequent to December 31, 2009 are as follows:


	Year ending December 31,
	(dollars in thousands)

2010	$	95
2011		60
2012		60
2013		60
2014		60
Thereafter		159

Total	$	494

Total rental expense related to the operating leases was $106,350, $120,281, and $76,449 for the years ended December 31, 2009, 2008 and 2007 respectively, and is included in occupancy expense.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Deposits

The composition of deposits at December 31, 2009 and 2008 is as follows:


	2009				2008
	Amount		Percentage of Total		Amount		Percentage of Total
	(dollars in thousands)

Demand deposits	$	44,924	12	%	$	46,032	13	%
Interest checking and money market		137,708	37	%		117,325	33	%
Savings		32,120	8	%		26,360	8	%
Time deposits $100,000 and over		64,736	17	%		63,321	18	%
Other time deposits		97,286	26	%		100,589	28	%

Total	$	376,774	100	%	$	353,627	100	%

The maturities of fixed-rate time deposits at December 31, 2009 are reflected in the table below:


Year ending December 31,	Time Deposits $100,000 and Over		Other Time Deposits
	(dollars in thousands)

2010	$	53,500	$	78,857
2011		9,583		15,676
2012		1,044		1,659
2013		507		494
2014		102		590
Thereafter		—		10

Total	$	64,736	$	97,286

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 – Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2009 and 2008


	2009				2008
	Amount		Rate		Amount		Rate
	(dollars in thousands)
At year-end
Federal funds purchased	$	—	0.00	%	$	—	0.00	%
Securities sold under repurchase agreements		—	0.00	%		1,463	0.92	%
Master notes		11,482	0.50	%		8,903	1.00	%
Notes payable		58	3.80	%		8	6.00	%
Short-term line of credit		—	0.00	%		2,600	2.25	%
Short-term advances from FHLB		15,400	0.36	%		9,275	0.46	%

	$	26,940	0.42	%	$	22,249	0.92	%


	2009				2008
	Amount		Rate		Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	273	1.05	%	$	1,245	2.93	%
Securities sold under repurchase agreements		669	0.89	%		1,354	1.37	%
Master notes		11,298	0.83	%		8,882	1.36	%
Notes payable		56	3.25	%		8	6.00	%
Short-term line of credit		724	1.68	%		703	3.18	%
Short-term advances from FHLB		11,401	1.70	%		7,278	4.46	%

	$	24,421	1.29	%	$	19,470	2.72	%


	2009		2008
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	1,250	$	6,050
Securities sold under repurchase agreements		1,740		1,752
Master notes		12,559		11,657
Notes payable		58		8
Short-term line of credit		2,600		6,600
Short-term advances from FHLB		24,275		14,000

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Securities sold under repurchase agreements represent short-term borrowings collateralized by securities of the United States government or its agencies. Master notes represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place.

On September 25, 2007, the Company borrowed $6.6 million from a bank at an interest rate of prime less one percent. During 2008 principal payments were made on this note in the amount of $4.0 million. The remaining balance of $2.6 million was paid off during 2009.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 – Short-Term Borrowed Funds (Continued)

The subsidiary banks have combined available lines of credit for federal funds in the amount of $18.8 million at December 31, 2009.

Note 10 – Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $79.6 million at December 31, 2009. The long-term advances under this line amounted to $19.0 million and $25.0 million at December 31, 2009 and 2008, respectively. Interest rates ranged from 1.57% to 5.50% in 2009 and from 2.96% to 7.52% in 2008. Two subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $10.0 million at December 31, 2009.

During the second and third quarters of 2008, the Company began a private placement of up to 7,500 fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities may be redeemed by the Company after June 30, 2010 and the final maturity date is June 30, 2015. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $7.4 million that was outstanding at December 31, 2009.

On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $82,781 at December 31, 2009.

On May 13, 2009, the Company executed a note payable in the amount of $200,000 for the purchase of existing leased office space. The note bears interest at 3.43% and is to be paid in four equal annual payments of $50,000. The outstanding balance of this note was $200,000 at December 31, 2009.

As of December 31, 2009, the scheduled maturities of these advances and notes payable are as follows:


	Year ending December 31,
	(dollars in thousands)

2011	$	10,059
2012		3,059
2013		4,560
2014		1,510
2015		7,430
Thereafter		25

Total	$	26,643

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 – Income Tax Matters

The significant components of income tax expense for the years ended December 31 are summarized as follows:


	2009			2008			2007
	(dollars in thousands)
Current tax expense:
Federal	$	428		$	1,225		$	844
State		146			307			238

Total		574			1,532			1,082


Deferred tax expense:
Federal		(620	)		(607	)		198
State		(117	)		(121	)		7

Total		(737	)		(728	)		205


Net provision for income taxes	$	(163	)	$	804		$	1,287

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:


	2009			2008			2007
	(dollars in thousands)

Tax computed at the statutory federal rate	$	179		$	963		$	1,443
Increases (decrease) resulting from:
Tax exempt interest, net		(269	)		(267	)		(245	)
State income taxes, net of federal benefit		19			123			162
Other		(92	)		(15	)		(73	)

Provision for income taxes	$	(163	)	$	804		$	1,287

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 – Income Tax Matters (Continued)


	2009			2008			2007
	(dollars in thousands)
Deferred tax assets relating to:
Net unrealized loss on securities available for sale	$	—		$	979		$	—
Allowance for loan losses		1,772			1,305			935
Deferred compensation		635			494			357
Other		462			126			(10	)

Total deferred tax assets		2,869			2,904			1,282

Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		(613	)		—			(241	)
Premises and equipment		(371	)		(301	)		(369	)
Deferred loans fees and costs		(214	)		(213	)		(213	)
Loan servicing		(158	)		(41	)		(78	)
Prepaid expenses		(157	)		(138	)		(110	)
Other		—			—			(8	)

Total deferred tax liabilities		(1,513	)		(693	)		(1,019	)

Net recorded deferred tax asset	$	1,356		$	2,211		$	263

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

Note 12 – Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The subsidiary banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

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

As of December 31, 2009 and 2008, outstanding financial instruments whose contract amounts represent credit risk were as follows:


	2009		2008
	(dollars in thousands)

Commitments to extend credit	$	91,648	$	79,649
Credit card commitments		8,697		10,923
Standby letters of credit		881		981

	$	101,226	$	91,553

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 – Commitments and Contingencies (Continued)

Contingencies

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

During 2009, the Company had entered into a contract to construct the new Locust branch office. At of December 31, 2009, there was $894,000 remaining on the contract. The branch will be opening in 2010.

Financial Instruments with Concentration of Credit Risk

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

Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Banks’ Policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows. Credit losses related to this real estate concentration are consistent with credit losses experienced in the portfolio as a whole.

Note 13 – Related Party Transactions

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

(dollars in thousands)


Balance at December 31, 2008	$	15,449
Disbursements during the year		7,221
Collections during the year		(7,881	)


Balance at December 31, 2009	$	14,789

At December 31, 2009, the Company had approved, but unused lines of credit, totaling $6.4 million to executive officers, directors, officers and their related interests.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 – Shareholders’ Equity and Regulatory Matters

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

The Company and its subsidiary banks are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measure of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total and Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets. Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.


	Actual				Minimum For Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2009

Total Capital to Risk
Weighted Assets:
Consolidated	$	54,052	14.0	%	$	30,908	8.0	%	$	38,635	10.0	%
Bank of Stanly		32,980	12.9	%		20,413	8.0	%		25,516	10.0	%
Anson Bank and Trust		5,278	13.3	%		3,165	8.0	%		3,956	10.0	%
Cabarrus Bank and Trust		12,260	13.8	%		7,120	8.0	%		8,901	10.0	%

Tier I Capital to Risk
Weighted Assets:
Consolidated		42,024	10.9	%		15,454	4.0	%		23,181	6.0	%
Bank of Stanly		29,782	11.7	%		10,206	4.0	%		15,310	6.0	%
Anson Bank and Trust		4,795	12.1	%		1,582	4.0	%		2,374	6.0	%
Cabarrus Bank and Trust		11,332	12.7	%		3,560	4.0	%		5,340	6.0	%

Tier I Capital to
Average Assets:
Consolidated		42,204	8.8	%		19,086	4.0	%		23,857	5.0	%
Bank of Stanly		29,782	9.4	%		12,709	4.0	%		15,887	5.0	%
Anson Bank and Trust		4,795	8.8	%		2,171	4.0	%		2,714	5.0	%
Cabarrus Bank and Trust		11,322	10.9	%		4,161	4.0	%		5,201	5.0	%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 – Shareholders’ Equity and Regulatory Matters (Continued)


December 31, 2008

Total Capital to Risk
Weighted Assets:
Consolidated	$	53,368	14.4	%	$	29,626	8.0	%	$	37,033	10.0	%
Bank of Stanly		33,357	13.1	%		20,349	8.0	%		25,436	10.0	%
Anson Bank and Trust		4,477	12.5	%		2,864	8.0	%		3,580	10.0	%
Cabarrus Bank and Trust		12,170	15.4	%		6,327	8.0	%		7,908	10.0	%

Tier I Capital to Risk
Weighted Assets:
Consolidated		41,736	11.3	%		14,813	4.0	%		22,220	6.0	%
Bank of Stanly		30,176	11.9	%		10,174	4.0	%		15,261	6.0	%
Anson Bank and Trust		4,061	11.3	%		1,432	4.0	%		2,148	6.0	%
Cabarrus Bank and Trust		11,554	14.6	%		3,163	4.0	%		4,745	6.0	%

Tier I Capital to
Average Assets:
Consolidated		41,736	9.5	%		17,519	4.0	%		21,899	5.0	%
Bank of Stanly		30,176	10.1	%		11,901	4.0	%		14,876	5.0	%
Anson Bank and Trust		4,061	8.6	%		1,892	4.0	%		2,365	5.0	%
Cabarrus Bank and Trust		11,554	13.3	%		3,471	4.0	%		4,339	5.0	%

As of December 31, 2009, the most recent notification from the Federal Deposit Insurance Corporation categorized all subsidiary banks as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorizations.

On December 23, 2008, the Company entered into a letter agreement with the United States Department of Treasury to sell 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred”) with a redemption value of $10.0 million. The Company also issued a warrant to the Treasury that was immediately exercised for 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Warrant Preferred”) with redemption value of $500,000. Combined proceeds received for the issuance of both the Senior Preferred and the Warrant Preferred was $10.0 million, resulting in a net discount that has been allocated between the two issues based upon their relative fair values. As a condition of the Cumulative Perpetual Preferred Stock, the Company must obtain consent from the United States Department of the Treasury to repurchase its common stock or to pay a cash dividend. Furthermore, the Company has agreed to certain restrictions on executive compensation.

The Senior Preferred qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. Under the terms of the agreement, the Senior Preferred may be redeemed with prior approval from the Federal Reserve in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends.

The Warrant Preferred also qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of its issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years. At December 31, 2009 the remaining discount was $400,000.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 – Shareholders’ Equity and Regulatory Matters (Continued)

On December 31, 2008, the Company entered into agreements with its subsidiary banks to sell Fixed Rate Noncumulative Perpetual Preferred Stock to the Company to provide an avenue for pushing portions of the funds received from Company’s issuance of preferred stock down to the subsidiary bank level. At December 31, 2009, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.0 million in Anson and $3.0 million in Cabarrus.

All of the Company’s aforementioned investments in its subsidiary banks qualify for Tier 1 capital treatment and are included as such in their respective year end capital ratios.

For the reserve maintenance period in effect at December 31, 2009, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $1.1 million as reserves on deposit liabilities.

Note 15 – Stock Matters

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2009, the SOP had 268,355 shares still outstanding and the SPP had no options outstanding.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2009, the SOP II had 12,360 shares outstanding and the SPP II had no options outstanding.

Employee Stock Plans

Activity under all option plans, reflecting the effects of the 3% stock dividends issued in 2008 and 2007, are as follows:


	2009				2008				2007
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding at the beginning of the year	459,856		$	4.54	519,328		$	4.47	551,613		$	4.46

Options granted	—			—	12,360			5.34	—			—
Options exercised	—			—	(71,824	)		4.19	(13,538	)		2.66
Forfeitures	(179,141	)		4.22	(8	)		4.28	(18,747	)		5.30

Options outstanding at the end of the year	280,715		$	4.75	459,856		$	4.54	519,328		$	4.48


Options exercisable at the end of the year	270,827		$	4.73	431,470		$	4.49	487,281		$	4.42

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Stock Matters (Continued)

At December 31, 2009, total options outstanding at December 31, 2009 included 280,715 options exercisable at a range of $4.21 to $5.35 per share with a weighted average expected term of 2.92 years. Exercisable options at December 31, 2009 included 270,827 options exercisable at a range of $4.21 to $5.35 per share. At December 31, 2009, authorized shares of common stock reserved for future grants of options totaled 154,971 under the SOP II, and 103,234 under the SPP II.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the twelve months ended December 31, 2009 under the SOP II. There were 12,360 shares granted in 2008.

The following is a summary of stock option activity for the year ended December 31, 2009:


	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2008	459,856		$	4.54
Granted	—
Exercised	—
Forfeited	(179,141	)		4.22


Outstanding at December 31, 2009	280,715			4.75	$	—


Options exercisable at December 31, 2009	270,827			4.73		—

A summary of the status of the Company’s non-vested stock options as of December 31, 2009, and changes during the year then ended is presented below:


	Shares		Weighted Average Grant Date Fair Value
Non-vested December 31, 2008	28,386		$	1.49
Granted	—			—
Vested	(18,498	)		1.43
Forfeited	—			—

Non-vested December 31, 2009	9,888			1.60

The grant date fair value of stock options vested over the twelve months ended December 31, 2009, 2008 and 2007 was $26,438, $22,478 and $42,231 respectively.

As of December 31, 2009, there was $11,590 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans. That cost is expected to be recognized over a weighted-average period of 3.3 years.

The Company funds the option shares from authorized but unissued shares. The Company does not typically purchase shares to fulfill the obligations of the stock benefit plans. Company policy does allow option holders to exercise options with seasoned shares.

For the twelve months ended December 31, 2008 and 2007 the intrinsic value of options exercised was $74,409 and $38,055, respectively. There were no options exercised in 2009.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Stock Matters (Continued)

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. Pursuant to stock repurchase authorizations and limitations, the Company purchased 111,258 shares during 2008 at an aggregate purchase price of $570,839. There were no shares repurchased during 2009.

Note 16 – Employee and Director Benefit Plans

Employees’ Savings Plus and Profit Sharing Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates who are scheduled to work 500 hours or more are eligible to participate upon completion of six months of employment.

The Company’s annual contribution to the plan was $210,884 in 2009, $206,478 in 2008 and $192,776 in 2007, determined as follows:

•

A matching contribution equivalent to 50% of the first 6% of each associate’s compensation contributed to the plan.

•

A discretionary contribution, subject to approval by the Board of Directors, limited to an amount not to exceed the maximum amount deductible for income tax purposes.

Directors’ Deferred Compensation Plan

On March 1, 1994, the Company established a Directors’ Deferred Compensation Plan in accordance with the laws of the State of North Carolina under which each Director could elect to defer receipt for services rendered to the Company as a Director during the term of his or her service by entering into a written deferred compensation election. This plan was closed to new participants in 2001; subsequently, only two directors continued to defer receipt of fees in 2007 and one director continued in 2008. The balance in deferred directors’ compensation, not yet disbursed, was $165,487 at December 31, 2008. The plan has now been terminated and all funds have been disbursed. Expense for the years ended December 31, 2009, 2008 and 2007 was $12,078, $12,298 and $12,956, respectively.

Employee Stock Ownership Plan

The Company established an Employee Stock Ownership Plan (“ESOP”) to benefit all qualified employees. The ESOP purchased 293,216 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2009, the outstanding balance of the loan is $666,636 and is presented as a reduction of shareholders’ equity.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 – Employee and Director Benefit Plans (Continued)

Shares released as the debt is repaid and earnings from the common stock held by the ESOP are allocated among active participants on the basis of compensation in the year of allocation. Benefits vest 100% as they are allocated to participants. Dividends on unallocated shares may be used by the ESOP to repay the loan to the Company and are not reported as dividends in the financial statements. Dividends on allocated or committed to be allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.

Expenses of $350,068, $326,633 and $317,256 during the years ended December 31, 2009, 2008 and 2007, respectively, have been incurred in connection with the ESOP. At December 31, 2009, 333,353 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP’s participants for purposes of computing earnings per share. The fair value of the unallocated shares amounted to approximately $525,676 at December 31, 2009.

Supplemental Executive Retirement Plan

The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. Certain of the plan benefits will accrue and vest during the period of employment, and will be paid in fixed monthly benefit payments for up to ten years commencing with the officer’s retirement at any time after attainment of the age specified in the officer’s plan agreement. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed. The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

During 2009, 2008 and 2007 a provision of $500,800, $383,800 and $199,328, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation deferred under the plan amounts to $2.0 million and $1.5 million at December 31, 2009 and 2008, respectively.

Split-Dollar Life Insurance

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2009 and 2008, the expense associated with these policies was $35,829 and $64,130, respectively.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 – Fair Values of Financial Instruments and Interest Rate Risk

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 below are made at December 31, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2009 and 2008.


	2009				2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	10,859	$	10,896	$	13,284	$	13,284
Securities available for sale		76,317		76,317		68,835		68,835
Loans held for investment, net		348,453		363,619		336,469		354,083
Loans held for sale		2,628		2,634		2,691		2,691
FHLB Stock		3,201		3,201		2,284		2,284
Bank-owned life insurance		5,714		5,714		5,511		5,511
Accrued interest receivables		2,077		2,077		2,027		2,027

Financial Liabilities
Deposits	$	376,774	$	400,997	$	353,627	$	354,589
Short-term borrowings		26,940		26,940		22,249		22,249
Long-term debt		26,643		28,173		32,502		33,306
Accrued interest payable		396		396		502		502

The carrying amount of cash and cash equivalents and accrued interest approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. See Note 2. The carrying amount of bank-owned life insurance is the current cash value. It is not practicable to determine fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability and it is presented at its carrying value.

The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments:

•

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans held for investment does not consider the lack of liquidity and uncertainty in the market that would affect the valuation under ASC 820.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 – Fair Values of Financial Instruments and Interest Rate Risk (Continued)

•

Deposits – The fair value of checking, savings and money market deposit is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analyses using offered market rates.

•

Borrowings – The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates.

At December 31, 2009, the subsidiary banks 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, they were deemed to have no current fair value. See Note 12.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008:


	December 31, 2009 (dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	3,019	$	3,019	$	—	$	—
US Gov’t		20,971		20,971		—		—
Mortgage-backed securities and CMO’s		35,242		—		35,242		—
Private label CMO’s		7,500		—		7,500		—
State and political subdivisions		9,585		—		9,585		—


Total assets at fair value	$	76,317	$	23,990	$	52,327	$	—


Total liabilities at fair value	$	—	$	—	$	—	$	—


	December 31, 2008 (dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Gov’t	$	10,643	$	10,643	$	—	$	—
Mortgage-backed securities and CMO’s		33,615		—		33,615		—
Private label CMO’s		7,781		—		7,593		188
State and political subdivisions		16,796		—		16,796		—


Total assets at fair value	$	68,835	$	10,643	$	58,004	$	188


Total liabilities at fair value	$	—	$	—	$	—	$	—

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 – Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The following table provides reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) during 2009:

(dollars in thousands)


Balance December 31, 2008	$	188
Total realized losses included in earnings		(94	)
Sales		(94	)
Transfers into level 3		3,667
Write-down to market value		(1,682	)
Transfers into level 2		(1,985	)

Balance at December 31, 2009	$	—

Investment securities available for sale having a Level 3 value of $188,111 at December 31, 2008 were disposed of during the first quarter of 2009 with an additional loss of $93,714.

Prices for US Treasury and government agency 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 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 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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 – Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2009 and December 31, 2008:


	December 31, 2009 (dollars in thousands)
	Total		Level 1		Level 2		Level 3

Loans	$	13,519	$	—	$	13,519	$	—
Loans held for sale		2,628		—		2,628		—
Other real estate owned		3,419		—		3,419		—
Mortgage servicing rights		1,890		—		—		1,890


Total assets at fair value	$	21,456	$	—	$	19,566	$	1,890

Total liabilities at fair value	$	—	$	—	$	—	$	—


	December 31, 2008 (dollars in thousands)
	Total		Level 1		Level 2		Level 3

Loans	$	6,688	$	—	$	6,688	$	—
Loans held for sale		2,691		—		2,691		—
Mortgage servicing rights		1,293		—		—		1,293


Total assets at fair value	$	10,672	$	—	$	9,379	$	1,293

Total liabilities at fair value	$	—	$	—	$	—	$	—

ASC 825 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of ASC 825, the Company did not elect to report any assets and liabilities at fair value.

Interest Rate Risk

The Company assumes interest rate risk (the risk that general interest rate levels will change) in the course of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a falling rate environment and less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 – Parent Company Financial Data

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

Condensed Balance Sheets


	December 31,
	2009		2008
	(dollars in thousands)

Assets
Cash and demand deposits with bank subsidiaries	$	408	$	3,297
Interest-earning deposits with bank subsidiaries		12,030		10,157
Investments in:
Bank subsidiaries		47,908		45,348
Nonbank subsidiaries		358		331
Other assets		2,556		1,387

Total assets	$	63,260	$	60,520


Liabilities and shareholders’ equity
Master notes	$	11,482	$	8,903
Long-term debt		—		2,600
Junior subordinated debentures		7,419		7,419
Other liabilities		335		365
Shareholders’ equity		44,024		41,233

Total liabilities and shareholders’ equity	$	63,260	$	60,520

Condensed Statement of Operations


	2009			2008			2007
	(dollars in thousands)

Equity in earnings of subsidiaries	$	1,260		$	2,738		$	3,734
Interest income		113			133			493
Management and service fees		5,468			4,464			4,227
Other income		91			94			119
Interest expense		(533	)		(535	)		(1,029	)
Other operating expense		(6,122	)		(5,230	)		(4,978	)
Income tax benefit		413			365			393


Net income	$	690		$	2,029		$	2,959

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 – Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows


	2009			2008			2007
	(dollars in thousands)
Cash flows from operating activities
Net income	$	690		$	2,029		$	2,959
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Equity in earnings of subsidiaries		(1,260	)		(2,738	)		(3,734	)
(Increase) decrease in other assets		(753	)		(2,012	)		618
Increase (decrease) in other liabilities		(30	)		(72	)		304

Net cash provided (used) by operating activities		(1,353	)		(2,793	)		147


Cash flows from investing activities
Dividends received from subsidiaries		900			200			1,800

Net cash provided by investing activities		900			200			1,800


Cash flows from financing activities
Net increase (decrease) in master notes		2,579			(727	)		3,022
Net increase (decrease) in long-term debt		(2,600	)		(4,000	)		4,600
Net decrease in subordinated debentures		—			—			(5,155	)
Net proceeds from issuance of junior subordinated debentures		—			7,419			—
Repurchase of common stock		—			(571	)		(1,404	)
Net proceeds from issuance of preferred stock		—			10,500			—
Proceeds from issuance of common stock		—			301			36
Preferred stock purchased from bank subsidiaries		—			(7,000	)		—
Dividends on preferred stock		(542	)		(13	)		—
Tax benefit of stock options exercised		—			26			3
Cash paid for fractional shares		—			(7	)		(9	)

Net cash provided (used) by financing activities		(563	)		5,928			1,093


Net increase (decrease) in cash and cash equivalents		(1,016	)		3,335			3,040
Cash and cash equivalents at beginning of period		13,454			10,119			7,079

Cash and cash equivalents at end of period	$	12,438		$	13,454		$	10,119

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 – Quarterly Financial Data


	First			Second			Third			Fourth
	(in thousands, except per share data)
2009
Interest income	$	6,374		$	6,182		$	6,226		$	6,280
Interest expense		(2,087	)		(1,996	)		(1,929	)		(1,685	)


Net interest income		4,287			4,186			4,297			4,595
Provision for loan losses		(372	)		(196	)		(295	)		(869	)


Net interest income after provision for loan losses		3,915			3,990			4,002			3,726
Noninterest income		2,324			2,173			1,633			(306	)
Noninterest expense		(4,879	)		(5,281	)		(5,315	)		(5,455	)


Income before taxes		1,360			882			320			(2,035	)
Income taxes		455			259			30			(907	)


Net income (loss)	$	905		$	623		$	290		$	(1,128	)


Dividends on preferred stock		(162	)		(160	)		(159	)		(161	)

Net income (loss) available to common Shareholders	$	743		$	463		$	131		$	(1,289	)


Net income (loss) per common share
Basic	$	0.10		$	0.06		$	0.02		$	(0.17	)

Diluted	$	0.10		$	0.06		$	0.02		$	(0.17	)


	First			Second			Third			Fourth
	(in thousands, except per share data)
2008
Interest income	$	6,697		$	6,382		$	6,267		$	6,218
Interest expense		(2,804	)		(2,429	)		(2,347	)		(2,248	)


Net interest income		3,893			3,953			3,920			3,970
Provision for loan losses		(86	)		(171	)		(529	)		(183	)


Net interest income after provision for loan losses		3,807			3,782			3,391			3,787
Noninterest income		1,865			1,895			1,650			1,345
Noninterest expense		(4,523	)		(4,532	)		(4,542	)		(5,092	)


Income before taxes		1,149			1,145			499			40
Income taxes		374			373			156			(99	)


Net income	$	775		$	772		$	343		$	139


Dividends on preferred stock		—			—			—			(13	)

Net income available to common Shareholders	$	775		$	772		$	343		$	126


Net income per common share
Basic	$	0.10		$	0.10		$	0.05		$	0.02

Diluted	$	0.10		$	0.10		$	0.05		$	0.02

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(in thousands except per share and shares outstanding information)


	2009			2008			2007			2006			2005
Summary of Operations
Interest income	$	25,062		$	25,564		$	26,909		$	24,353		$	19,161
Interest expense		7,697			9,828			11,876			10,702			6,630

Net interest income		17,365			15,736			15,033			13,651			12,531
Provision for loan losses		1,732			969			15			298			755
Noninterest income		5,824			6,597			6,590			5,469			4,351
Noninterest expense		20,930			18,531			17,362			15,918			14,087
Income taxes		(163	)		804			1,287			833			523

Net income	$	690		$	2,029		$	2,959		$	2,071		$	1,517


Per Common Share
Net income - basic (1)	$	0.01		$	0.27		$	0.39		$	0.27		$	0.19
Net income - diluted (1)		0.01			0.27			0.39			0.26			0.19
Book value (1)		4.47			4.11			4.14			3.76			3.51
Weighted Average Shares
Outstanding:
Basic (1)		7,474,140			7,482,488			7,603,494			7,685,978			7,683,316
Diluted (1)		7,474,140			7,520,484			7,706,832			7,802,102			7,870,576
Ratios
Return on average assets		0.15	%		0.48	%		0.75	%		0.56	%		0.45	%
Return on average equity		1.60	%		6.29	%		9.73	%		7.32	%		5.58	%
Average equity to average assets		9.15	%		7.63	%		7.73	%		7.67	%		8.14	%

Selected Year-end Balances
Assets	$	477,846		$	452,468		$	411,944		$	383,261		$	350,190
Loans held for investment		353,729			340,830			321,987			288,135			272,842
Securities		76,317			68,835			51,005			37,150			35,016
Deposits		376,774			353,627			324,657			309,600			273,976
Borrowed funds		53,583			54,751			53,619			42,329			47,007
Shareholders’ equity		44,024			41,233			31,574			29,633			27,453

Selected Average Balances
Assets	$	471,729		$	422,857		$	393,188		$	368,781		$	334,193
Loans held for investment		346,976			335,791			308,149			293,394			267,164
Securities		78,049			48,926			41,188			35,227			29,038
Deposits		369,957			337,384			312,261			289,742			254,591
Borrowed funds		55,084			50,643			48,075			48,510			50,265
Shareholders’ equity		43,182			32,245			30,402			28,299			27,187

(1)	Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2005 through 2008 have been adjusted to reflect 3% stock dividends issued in 2008, 2007, 2006, and 2005. There was not a stock dividend issued in 2009.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 37 - 76. References to changes in assets and liabilities represent end of period balances unless otherwise noted. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect 3% stock dividends in 2008 and 2007. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Financial Condition at December 31, 2009 and December 31, 2008

The Company’s total assets increased $25.3 million or 5.6% from $452.5 million at December 31, 2008 to $477.8 million at December 31, 2009. This increase resulted primarily from a $12.9 million increase in loans held for investment and a $7.5 million increase in securities available for sale.

Cash and cash equivalents decreased $2.4 million during the year ended December 31, 2009. Cash and due from banks increased $4.6 million, while interest-earning deposits with banks declined $7.0 million.

Investment securities increased $7.5 million or 10.9%, from $68.8 million at December 31, 2008 to $76.3 million at December 31, 2009. As a result of the financial markets dislocations which occurred in the second half of 2008, the Company had $2.5 million in net unrealized losses at December 31, 2008. Actions taken by the Federal Reserve have mostly stabilized the markets and brought about the resumption of more rational pricing. As a result, on December 31, 2009, the Company had net unrealized gains of $1.6 million. The Company evaluated its entire investment portfolio for other than temporary impairments. Management believes that all of the unrealized losses are only temporary with the exception of a portion of the private label CMO investment portfolio. The Company owns $7.5 million in whole loan private label CMOs. Based on the erosion of the underlying collateral, management determined that an impairment charge was warranted. Thus, the Company recorded $1.8 million in impairments on this portion of the portfolio during 2009. Subsequent to year end, management made the decision to sell the entire private label CMO portfolio realizing an additional loss of approximately $94 thousand. During the year, the Company purchased $35.9 million in new securities, had $5.5 million in municipal bonds called and sold $5.0 million in securities. For the twelve months ended December 31, 2009 the Company had net realized losses of $711 thousand.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Loans held for investment increased $12.9 million from $340.8 million at December 31, 2008 to $353.7 million at December 31, 2009. The Company experienced positive growth trends in the commercial, consumer, residential real estate and commercial real estate loans at a growth rate of 13.8%, 7.3%, 3.5% and 7.1%, respectively. These positive trends were offset by an 11.2% decline in real estate construction. Loans held for sale decreased 2.3% or $63 thousand during the year. The allowance for loan losses was $5.3 million at December 31, 2009, which represents 1.49% of the loan portfolio, an increase from $4.4 million or 1.28% at December 31, 2008.

Premises and equipment increased $2.5 million or 22.6% during 2009. The Company completed the purchase of a tract of land in Locust and began construction of a new branch to be completed during 2010. The Company purchased a branch office building that had been leased for a long period of time. Also, the Company purchased two other buildings to be used for future office space.

Other changes in our consolidated assets are related to interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned and other assets. Bank owned life insurance and interest receivable increased $203 thousand and $50 thousand, respectively, while other real estate owned increased $603 thousand. The Company did have an investment of $172 thousand in common stock of the parent company of Silverton Bank. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. The Company has written off this investment as of March 31, 2009. Federal Home Loan Bank stock increased $917 thousand because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings. The Company was also required to increase their ownership in Federal Reserve Bank stock by $210 thousand during the year. Other assets increased $2.1 million for the year. At the end of 2009, the FDIC required all financial institutions to prepay their FDIC assessments for the next three years. The Company’s prepayment amount totaled $2.1 million resulting in the increase in other assets.

Customer deposits continued to be our principal funding source in 2009, allowing us to fund the growth in assets discussed above. At December 31, 2009, deposits from our customers totaled $376.8 million, an increase of $23.2 million, or 6.6%, from $353.6 million at December 31, 2008. Interest checking and money market accounts and savings deposits increased $20.4 million and $5.8 million, respectively, while time deposits and demand, noninterest-bearing decreased $1.9 million and $1.1 million, respectively.

During 2009 the Company’s net borrowings decreased by $1.2 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2009, $34.4 million of the total borrowings of $53.6 million were attributed to Federal Home Loan Bank advances.

At December 31, 2009, total shareholders’ equity was $44.0 million, an increase of $2.8 million from December 31, 2008. Net income for the period was $690 thousand. Unrealized gains on investment securities, net of tax improved $2.6 million. These increases were offset as the Company also recorded $542 thousand in dividends and discount accretions on the series A and B preferred stock for the twelve month period. At December 31, 2009, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Results of Operations for the Years Ended December 31, 2009 and 2008

Earnings

Uwharrie Capital Corp reported net income of $690 thousand for the twelve months ended December 31, 2009, as compared to $2.0 million or the twelve months ended December 31, 2008, a decrease of $1.3 million. Net income available to common shareholders was $48 thousand or $0.01 per common share at December 31, 2009, compared to $2.0 million or $0.27 per common share at December 31, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

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

Net interest income increased $1.7 million to $17.4 million for 2009 compared to the $15.7 million earned in 2008. During the year ended December 31, 2009 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $1.4 million. The average yield on our interest-earning assets decreased 74 basis points to 5.89%, while the average rate we paid for our interest-bearing liabilities decreased 84 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in an increase of 10 basis points in our interest rate spread, from 3.76% in 2008 to 3.86% in 2009. Our net interest margin for 2009 was 4.12%, compared to 4.13% in 2008. Financial Table 1 on page 87 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 88 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $1.7 million and $1.0 million for the twelve months ended December 31, 2009 and 2008 respectively. There were net loan charge-offs of $817 thousand for the twelve months ended December 31, 2009 as compared with net loan charge-offs of $118 thousand during the same period of 2008. Refer to the Asset Quality discussion beginning on page 82 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

decreased 12.1%, from $6.6 million in 2008 to $5.8 million in 2009, a decrease of $773 thousand. Service charges on deposit accounts produced earnings of $2.4 million an increase of 5.5%. The Company also benefited from an increase in income from mortgage loan sales of $2.2 million resulting from an increase in mortgage loan originations. The rate reductions during 2008 by the Federal Reserve attributed to this increase 2009. These increases were offset by a decrease in other service fees and commissions of $504 thousand. Income generated from brokerage commissions and asset management fees decreased $389 thousand to $1.3 million, while other banking fees decreased $115 thousand or 10.1% during 2009. The recent downturn in the economy and the impact it has had on the overall stock market was the attributing factor to the decline in brokerage commissions and asset management fees. The Company had realized losses on the securities available for sale of $711 thousand and a loss of $172 thousand on the aforementioned Silverton Bank stock. As previously discussed, the Company recorded an additional other-than-temporary impairment of $1.8 million during 2009 compared to $158 thousand in 2008.

Noninterest Expense

Noninterest expense for the year ended December 31, 2009 was $20.9 million compared to $18.5 million for the same period of 2008, an increase of $2.4 million. Salaries and employee benefits, the largest component of noninterest expense, increased $890 thousand, from $10.6 million for the period ending December 31, 2008 to $11.5 million for the same period in 2009. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy and equipment expense had a combined increase of $141 thousand. Professional fees and services increased $281 thousand FDIC assessment costs also increased $830 thousand during the twelve month ending December 31, 2009. Not only has the assessment rate charged by the FDIC to all FDIC-insured financial institutions increased, but also the Company received and utilized FDIC credits that reduced its assessment charges during 2008. Other noninterest expense increased $239 thousand for the comparable twelve month period. The table on page 91 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax benefit of $163 thousand for 2009 compared to income tax expense of $804 thousand in 2008 at an effective tax rate of 28.38%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance.

Results of Operations for the Years Ended December 31, 2008 and 2007

Earnings

The Company earned net income of $2.0 million, or $0.27, per basic common share for 2008 as compared with net income of $2.9 million, or $0.39 per basic common share, in 2007.

Net Interest Income

Net interest income increased $703 thousand to $15.7 million for 2008 compared to the $15.0 million earned in 2007. During the year ended December 31, 2008 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $970 thousand. The average yield on our interest-earning assets decreased 86 basis points to 6.63%, while the average rate we paid for our interest-bearing liabilities decreased 92 basis points. The

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in an increase of 6 basis points in our interest rate spread, from 3.70% in 2007 to 3.76% in 2008. Our net interest margin for 2008 was 4.13%, compared to 4.24% in 2007. Financial Table 1 on page 87 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 88 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $969 thousand and $15 thousand for the twelve months ended December 31, 2008 and 2007 respectively. There were net loan charge-offs of $118 thousand for the twelve months ended December 31, 2008 as compared with net loan recoveries of $324 thousand during the same period of 2007. Refer to the Asset Quality discussion beginning on page 82 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income increased 2.5%, from $6.6 million in 2007 to $6.8 million in 2008, an increase of $165 thousand. Service charges on deposit accounts grew $50 thousand to $2.2 million. Other income increased $108 thousand for the year ended December 31, 2008. The Company owns shares of VISA® stock and also owned MasterCard® stock. VISA® redeemed a portion of this stock during the first quarter of 2008 resulting in other income of $59 thousand. We sold all of the shares of MasterCard® during second quarter of 2008 producing other income of $162 thousand. This income was the primary factor behind the growth in other income. The Company also benefited from an increase in income from mortgage loan sales of $251 thousand resulting from an increase in mortgage loan originations. The rate reductions during the year by the Federal Reserve attributed to this increase. These increases were offset by a decrease in other service fees and commissions of $320 thousand. Income generated from brokerage commissions and asset management fees decreased $260 thousand to $2.8 million, while other banking fees decreased $60 thousand or 5.0% during 2008. The recent downturn in the economy and the impact it has had on the overall stock market was the attributing factor to the decline in brokerage commissions and asset management fees.

Noninterest Expense

Noninterest expense increased $1.3 million to $18.7 million in 2008 compared to $17.4 million in 2007. Salaries and employee benefits, the largest component of noninterest expense, increased $481 thousand, from $10.1 million in 2007 to $10.6 million in 2008. Additions at the executive and bank support staff levels, together with normal salary increases, primarily account for this increase. Net occupancy expense increased $116 thousand during the year due to the afore- mentioned renovations on an office building. Other noninterest expense increased $478 thousand for the year, including electronic banking expense, a major component of this category, which increased by $86 thousand. Increased usage of electronic banking products is the reason for the increase. Loan collection expense increased $132 thousand during the period. A large majority of this increase was related to one loan relationship.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Income Tax Expense

The Company had income tax expense of $804 thousand for 2008 at an effective tax rate of 28.38% compared to income tax expense of $1.3 million in 2007 at an effective tax rate of 30.31%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance. The growth in nontaxable income outpaced the growth in taxable income resulting in the decrease in the effective tax rate.

Asset Quality

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 by recoveries of amounts previously charged off, and reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. 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, 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 either on discounted cash flows using the loan’s initial effective interest rate or on the fair value of the collateral for certain collateral dependent loans. 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 to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch 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. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for known and inherent losses 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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

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 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 as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

The provision for loan losses increased from $1.0 million in 2008 to $1.7 million in 2009, an increase of $763 thousand. This increase is a result of managements’ impairment evaluations and the increase in impaired reserves deemed necessary. During the year, impaired loans, which include all loans in nonaccrual status and other loans deemed by management to be impaired, were $24.1 million at December 31, 2009 compared to $12.5 million at December 31, 2008 resulting in an increase of $11.6 million. The increase in the level of impaired loans primarily resulted from five customer relationships that are included in impaired loans totaling $8.9 million. One of these relationships totaling $1.3 million was in nonaccrual at December 31, 2009. Total nonaccrual loans, which are a component of impaired loans, increased from $3.9 million at December 31, 2008 to $5.6 million at December 31, 2009. The Company had two relationships of $313 thousand that were in nonaccrual at the end of the year that have now been foreclosed and are currently included in other real estate owned. The Company had net loan charge-offs in 2009 and 2008 of $817 thousand and $118 thousand, respectively.

The allowance expressed as a percentage of gross loans held for investment increased 21 basis points from 1.28% at December 31, 2008 to 1.49% at December 31, 2009. The allowance, as a percentage of total impaired loans, decreased from 53.3% at December 31, 2008 to 49.5% at December 31, 2009. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 18.5% at December 31, 2008 to 10.8% at December 31, 2009. Nonperforming loans, which consist solely of nonaccrual loans, to total loans increased from 1.14% at December 31, 2008, to 1.59% at the end of 2009. The total allowance relative to non-performing loans decreased from 111.87% at the end of 2008 to 93.71% at this year end. Even in these difficult economic times, delinquencies have remained relatively constant and management believes the current level of allowance for loan losses to be adequate at this time.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

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

Nonperforming Assets

(dollars in thousands)


	At December 31,
	2009			2008			2007			2006			2005

Nonperforming Assets:
Nonaccrual loans	$	5,630		$	3,898		$	1,795		$	1,211		$	1,875
Other real estate owned		3,419			2,816			163			203			169

Total nonperforming assets	$	9,049		$	6,714		$	1,958		$	1,414		$	2,044

Accruing loans past due 90 days or more	$	17		$	3		$	—		$	500		$	339
Allowance for loan losses		5,276			4,361			3,510			3,171			4,482
Nonperforming loans to total loans		1.59	%		1.14	%		0.56	%		0.42	%		0.69	%
Allowance for loan losses to total loans		1.49	%		1.28	%		1.09	%		1.10	%		1.64	%
Nonperforming assets to total loans and		2.56	%		1.97	%		0.61	%		0.49	%		0.75	%
Nonperforming assets to total assets		1.89	%		1.48	%		0.48	%		0.37	%		0.58	%
Allowance for loan losses to nonperforming loans		93.71	%		111.87	%		195.57	%		261.78	%		239.09	%

Capital Resources

The Company continues to maintain good capital ratios that support its asset growth. The capital position is maintained through the retention of earnings and controlled growth. Regulatory agencies divide capital into Tier I (consisting of shareholders’ equity less ineligible intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier II (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company’s risk-adjusted assets and off-balance sheet items. In addition to these capital ratios, regulatory agencies have established a Tier I leverage ratio that measures Tier I capital to average assets less ineligible intangible assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier I leverage ratio of 4%. Banks which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a Tier I leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2009, the Company and its subsidiary banks were all well capitalized.

The Company expects to continue to exceed these minimums without altering current operations or strategy. Note 14 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

Dividends

The Board of Directors of Uwharrie Capital Corp declared a 3% stock dividend in 2008 and 2007. All references in this Annual Report to net income per share and weighted average

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

common and common equivalent shares outstanding reflect the effects of these stock dividends. There was not a dividend declared in 2009.

Liquidity

Liquidity, the ability to raise cash when needed without adversely impacting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 4 on page 90, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2009 included $18.8 million in federal funds lines of credit from correspondent banks and approximately $35.2 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.

At December 31, 2009, borrowings from federal funds lines and the issuance of commercial paper amounted to $11.5 million, while other short-term borrowings totaled $15.4 million. Long-term debt at that date consisted of advances of $19.0 million from the Federal Home Loan Bank, junior subordinated debt of $7.4 million, a mortgage payable of $74 thousand and a note payable for the purchase of a building of $150 thousand.

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

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2009.


	Payments Due by Period (in thousands)
	Total		On Demand or less than 1 year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Short-term debt	$	26,940	$	26,940	$	—	$	—	$	—
Long-term debt		26,643		—		13,118		13,500		25
Operating leases		494		95		120		279		—
Building construction		894		894		—		—		—


Total contractual cash obligations, excluding deposits		54,971		27,929		13,238		13,779		25

Deposits		376,774		347,109		27,962		1,703		—

Total contractual cash obligations, including deposits	$	431,745	$	375,038	$	41,200	$	15,482	$	25

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Critical Accounting Policy

The Company’s most significant critical accounting policy is the determination of its allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and/or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Refer to the discussion within Allowance for Loan Losses and in Note 1 to the consolidated financial statements for a comprehensive discussion regarding this accounting policy.

Off-Balance Sheet Arrangements

The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. See Note 12 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

The major component of income for the Company is net interest income, the difference between yield earned on assets and interest paid on liabilities. This differential or margin can vary over time as changes in interest rates occur. The volatility of changes in this differential can be measured by the timing (or repricing) difference between maturing assets and liabilities.

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 2009 is reflected in Financial Table 3 on page 89. While management reviews this information, it has implemented the use of a simulation model which calculates expected net interest income based on projected interest-earning assets, interest-bearing liabilities and interest rates and provides a more relevant view of interest rate risk than traditional gap tables. The simulation allows comparison of flat, rising and falling rate scenarios to determine sensitivity of earnings to changes in interest rates.

The Company models immediate rising and declining rate shocks of 2% on its subsidiary banks as preferred by regulators. The most recent consolidated 2% rate shock projections from the asset liability model, measured over a twelve-month period, indicate a negative impact of 13.20% on net interest income in a rates down scenario and a negative impact of 6.69% on net interest income in a rates up environment. Two of the subsidiary banks are asset sensitive and typically have some negative impact when rates decline, since the majority of interest bearing assets will reprice more quickly than the interest bearing liabilities. The other bank is liability sensitive, with the opposite effect, and the blend provides some balance in the consolidated results.

The principal goals of the Company’s asset liability management are the maintenance of adequate liquidity and the management of interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on interest-sensitive assets and liabilities to protect net interest income from wide fluctuations that could result from changes in interest rates. The Company’s Asset Liability Management Committee monitors market changes in interest rates and assists with pricing loan and deposit products consistent with funding source needs and asset growth projections.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 1

Average Balances and Net Interest Income Analysis

(dollars in thousands)


	2009						2008						2007
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income Expense		Average Yield Rate (1)

Interest-earning assets
Taxable securities	$	63,934		3,128	4.89	%	$	36,573	$	2,021	5.53	%	$	30,364	$	1,711	5.63	%
Non-taxable securities (1)		14,115		622	7.17	%		14,738		678	7.49	%		12,847		549	6.95	%
Short-term investments		6,334		66	1.04	%		5,386		85	1.58	%		14,219		733	5.16	%
Taxable loans (2)		345,448		21,020	6.08	%		332,986		22,592	6.78	%		304,195		23,724	7.80	%
Non-taxable loans (1)		4,387		226	8.38	%		4,086		188	7.49	%		3,954		192	7.90	%

Total interest-earning assets		434,218		25,062	5.89	%		393,769		25,564	6.63	%		365,579		26,909	7.49	%


Non-earning assets
Cash and due from banks		7,057						9,964						11,253
Premises and equipment, net		12,616						9,735						8,694
Interest receivable and other		17,838						9,389						7,662

Total non-earning assets		37,511						29,088						27,609

Total assets	$	471,729					$	422,857					$	393,188


Interest-bearing liabilities
Savings deposits	$	30,912	$	255	0.82	%	$	26,246	$	301	1.15	%	$	26,635	$	526	1.97	%
Interest checking & MMDA		120,307		838	0.70	%		109,469		1,357	1.24	%		102,643		2,550	2.48	%
Time deposits		172,108		4,816	2.80	%		155,983		6,281	4.03	%		136,217		6,454	4.74	%

Total deposits		323,327		5,909	1.83	%		291,698		7,939	2.72	%		265,495		9,530	3.59	%

Short-term borrowed funds		24,092		316	1.31	%		19,453		529	2.72	%		27,742		1,128	4.07	%
Long-term debt		30,992		1,472	4.75	%		31,190		1,360	4.36	%		20,333		1,218	5.99	%

Total interest-bearing liabilities		378,411		7,697	2.03	%		342,341		9,828	2.87	%		313,570		11,876	3.79	%


Noninterest liabilities
Transaction deposits		46,630						45,685						46,766
Interest payable and other		3,506						2,586						2,450

Total liabilities		428,547						390,612						362,786


Shareholders’ equity		43,182						32,245						30,402

Total liabilities and shareholders equity	$	471,729					$	422,857					$	393,188


Interest rate spread					3.86	%					3.76	%					3.70	%


Net interest income and net interest margin			$	17,365	4.12	%			$	15,736	4.13	%			$	15,033	4.24	%

1)	Yields related to securities and loans exempt from federal and/or state income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.

2)	Nonaccrual loans are included in loans, net of unearned income.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)


	2009 Versus 2008									2008 Versus 2007
	Volume			Rate			Net Change			Volume			Rate			Net Change
Interest-earning assets

Taxable securities	$	1,425		$	(318	)	$	1,107		$	346		$	(36	)	$	310
Non-taxable securities		(28	)		(28	)		(56	)		84			45			129

Short-term investments		12			(31	)		(19	)		(297	)		(351	)		(648	)
Taxable loans		802			(2,374	)		(1,572	)		2,099			(3,231	)		(1,132	)
Non-taxable loans		15			23			38			6			(10	)		(4	)

Total interest-earning assets		2,226			(2,728	)		(502	)		2,238			(3,583	)		(1,345	)


Interest-bearing liabilities

Savings deposits		46			(92	)		(46	)		(6	)		(219	)		(225	)

Transaction and MMDA deposits		105			(624	)		(519	)		127			(1,320	)		(1,193	)

Other time deposits		550			(2,015	)		(1,465	)		866			(1,039	)		(173	)
Short-term borrowed funds		93			(306	)		(213	)		(281	)		(318	)		(599	)

Long-term debt		(9	)		121			112			562			(420	)		142


Total interest-bearing liabilities		785			(2,916	)		(2,131	)		1,268			(3,316	)		(2,048	)


Net interest income	$	1,441		$	188		$	1,629		$	970		$	(267	)	$	703

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 3

Interest Rate Sensitivity Analysis

(dollars in thousands)


	1-90 Day Position			3-6 Month Position			6-12 Month Position			1-5 Year Position			> 5 Year Position			Total Position
Interest-earning assets
Interest-earning deposits with banks	$	1,841		$	747		$	750			—		$	—		$	3,338
Investment securities		2,806			2,903			3,372			32,906			34,330			76,317
FHLB and other stock		—			—			—			—			4,480			4,480
Loans held for sale		2,628			—			—			—			—			2,628
Loans held for investment		106,712			33,915			50,511			123,949			38,642			353,729


Total interest-earning assets		113,987			37,565			54,633			156,855			77,452			440,492


Interest-bearing liabilities
Deposits		39,334			45,919			68,035			104,281			74,281			331,850
Short-term borrowed funds		20,890			50			6,000			—			—			26,940
Long-term debt		—			—			—			19,188			7,455			26,643


Total interest-bearing liabilities		60,224			45,969			74,035			123,469			81,736			385,433


Interest sensitivity GAP per period	$	53,763		$	(8,404	)	$	(19,402	)	$	33,386		$	(4,284	)	$	55,059


Cumulative interest sensitivity GAP	$	53,763		$	45,359		$	25,957		$	59,343		$	55,059		$	55,059


Ratios
Cumulative gap as a percentage of total interest-earning assets		12.21	%		10.30	%		5.89	%		13.47	%		12.50	%		12.50	%

Cumulative interest-earning assets as a percentage of interest-bearing liabilities		189.27	%		142.71	%		114.40	%		119.54	%		114.28	%		114.28	%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 4

Investment Securities Portfolio Analysis

(dollars in thousands)


	December 31, 2009
	Amortized Cost		Estimated Fair Value		Book Yield(1)
Securities available for sale

U. S. Treasury
Due after one but within five years		3,024		3,019	1.50	%


U.S. Government agencies
Due after one but within five years		15,485		15,722	3.51	%
Due after five but within ten years		5,251		5,249	3.80	%

		20,736		20,971	3.58	%

Mortgage-backed securities
Due after one year but within five years		265		269	4.00	%
Due after five but within ten year		8,311		8,676	4.42	%
Due after ten years		25,610		26,297	4.78	%

		34,186		35,242	4.69	%

Private label CMO’s
Due after ten years		7,468		7,500	7.40	%


State and political
Due within one year		576		577	3.73	%
Due after one but within five years		3,886		4,024	6.18	%
Due after five but within ten year		2,113		2,213	6.96	%
Due after ten years		2,701		2,771	7.36	%

		9,276		9,585	6.55	%


Total Securities available for sale
Due within one year		576		577	3.74	%
Due after one but within five years		22,660		23,034	3.74	%
Due after five but within ten year		15,675		16,138	4.60	%
Due after ten years		35,779		36,568	5.54	%

	$	74,690	$	76,317	4.78	%

1)	Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 38.55% tax rate.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 5

Noninterest Income

(dollars in thousands)


	Year Ended December 31,
	2009			2008			2007
Service charges on deposit accounts	$	2,360		$	2,238		$	2,188
Other banking fees		1,023			1,138			1,198
Asset management fees		1,054			1,396			1,473
Brokerage commissions		196			243			426
Other noninterest income		480			578			400


Core noninterest income		5,113			5,593			5,685

Income from mortgage loan sales		3,436			1,208			957
Security gains (losses)		(711	)		—			(76	)
Loss on nonmarketable securities		(172	)		—			—
Total other-than-temporary impairment loss		(1,807	)		(158	)		—
Portion of loss recognized in other comprehensive income		—			—			—

Net impairment recognized in other comprehensive income		(1,807	)		(158	)		—
Gains (losses) from sale of OREO		(36	)		(41	)		(2	)
Other gains (losses) from sale of assets		1			(5	)		26


Total noninterest income	$	5,824		$	6,597		$	6,590

Financial Table 6

Other Noninterest Expense

(dollars in thousands)


	Year Ended December 31,
	2009		2008		2007
Office supplies and printing	$	335	$	286	$	277
Postage		200		200		173
Telephone and data lines		237		244		232
Loan collection cost		185		292		140
Foreclosed real estate expense		219		55		6
Shareholder relations expense		187		185		175
Dues and subscriptions		161		147		127
Subordinated debt issue costs		27		16		130
Other		1,417		1,304		1,156


Total other noninterest expense	$	2,968	$	2,729	$	2,416

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 7

Loan Portfolio Composition

(dollars in thousands)


	At December 31,
	2009					2008					2007
	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans
Loan type:
Commercial	$	51,723		14.63	%	$	45,470		13.35	%	$	37,724		11.72	%
Real estate - construction		44,976		12.72	%		50,661		14.87	%		46,546		14.46	%
Real estate - residential		144,154		40.77	%		139,346		40.90	%		135,842		42.21	%
Real estate - commercial		95,938		27.13	%		89,561		26.29	%		86,593		26.90	%
Consumer		16,628		4.70	%		15,499		4.55	%		15,022		4.67	%
Other		172		0.05	%		121		0.04	%		143		0.04	%


Total loans		353,591		100.00	%		340,658		100.00	%		321,870		100.00	%


Less:
Allowance for loan losses		(5,276	)				(4,361	)				(3,510	)
Unearned net loan fees		138					172					117


Net loans	$	348,453				$	336,469				$	318,477


	At December 31,
	2006					2005
	Amount			% of Total Loans		Amount			% of Total Loans
Loan type:
Commercial	$	36,406		12.64	%	$	37,299		13.68	%
Real estate—construction		27,342		9.49	%		21,206		7.78	%
Real estate—residential		126,111		43.79	%		116,715		42.81	%
Real estate—commercial		84,744		29.43	%		83,861		30.76	%
Consumer		13,262		4.60	%		13,479		4.94	%
Other		133		0.05	%		72		0.03	%


Total loans		287,998		100.00	%	$	272,632		100.00	%


Less:
Allowance for loan losses		(3,171	)				(4,482	)
Unearned net loan fees		137					210


Net loans	$	284,964				$	268,360

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 8

Selected Loan Maturities

(dollars in thousands)


	December 31, 2009
	One Year or Less		One to Five Years		Over Five Years		Total

Commercial and agricultural	$	26,385	$	19,285	$	6,053	$	51,723
Real estate – construction		26,896		13,379		4,701		44,976


Total selected loans	$	53,281	$	32,664	$	10,754	$	96,699


Fixed rate loans	$	21,740	$	93,114	$	55,972	$	170,826


Sensitivity to rate changes:
Variable interest rates	$	185,531	$	—	$	—	$	185,531

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 9

Activity in the Allowance for Loan Loss

(dollars in thousands)


	At or for the Year Ended December 31,
	2009			2008			2007			2006			2005__
Allowance for loan losses at beginning of year	$	4,361		$	3,510		$	3,171		$	4,482		$	4,983
Provision for loan losses		1,732			969			15			298			755

Loan charge-offs:
Commercial		39			122			—			1,533			1,124
Real estate		692			15			—			14			—
Consumer		140			151			224			140			254

Total charge-offs		871			288			224			1,687			1,378

Recoveries of loans previously charged off:
Commercial		19			120			440			34			3
Real estate		14			—			—			—			—
Consumer		21			50			108			44			119

Total recoveries		54			170			548			78			122

Net charge-offs (recoveries)		817			118			(324	)		1,609			1,256

Allowance for loan losses at end of year	$	5,276		$	4,361		$	3,510		$	3,171		$	4,482

Net (charge-offs) recoveries as a percent of average loans		0.24	%		0.04	%		0.11	%		(0.55	)%		(0.47	)%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 10

Allocation of the Allowance for Loan Losses

(dollars in thousands)


	At December 31,
	2009				2008				2007
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)		Amount		% of Total Loans (1)

Commercial	$	449	14.63	%	$	288	13.35	%	$	326	11.72	%
Real estate - construction		1,373	12.72	%		1,232	14.87	%		325	14.46	%
Real estate - residential		1,477	40.77	%		1,180	40.90	%		922	42.21	%
Real estate - commercial		1,541	27.13	%		1,385	26.29	%		1,715	26.90	%
Consumer loans		436	4.70	%		276	4.55	%		222	4.67	%
Other		—	0.05	%		—	0.04	%		—	0.04	%
Unallocated		—	0.00	%		—	—	%		—	—	%


Total loans	$	5,276	100.00	%	$	4,361	100.00	%	$	3,510	100.00	%


	At December 31,
	2006				2005
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
Commercial	$	356	12.64	%	$	2,474	13.68	%
Real estate - construction		255	9.49	%		101	7.78	%
Real estate - residential		1,235	43.79	%		323	42.81	%
Real estate - commercial		1,123	29.43	%		1,159	30.76	%
Consumer		202	4.60	%		369	4.94	%
Other		—	0.05	%		—	—	%
Unallocated		—	—	%		56	0.03	%


Total loans	$	3,171	100.00	%	$	4,482	100.00	%

(1)	Represents total of all outstanding loans in each category as a percent of total loans outstanding.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

Financial Table 11

Maturities of Time Deposits

(dollars in thousands)


	3 Months or Less		Over 3 Months to 6 Months		Over 6 Months to 12 Months		Over 12 Months		Total

Time Deposits of $100,000 or more	$	14,669	$	15,516	$	23,315	$	11,236	$	64,736

Other Time Deposits		20,201		25,576		33,080		18,429		97,286


	$	34,870	$	41,092	$	56,395	$	29,665	$	162,022

Financial Table 12

Securities Performance Ratios


	At December 31,
	2009		2008		2007		2006		2005
Return on average assets	0.15	%	0.48	%	0.75	%	0.56	%	0.45	%
Return on average equity	1.60	%	6.29	%	9.73	%	7.32	%	5.58	%
Equity to average assets ratio	9.15	%	7.63	%	7.73	%	7.67	%	8.14	%

UWHARRIE CAPITAL CORP

Board of Directors


W. Stephen Aldridge, III President Stanly Funeral Home, Inc. Joe S. Brooks Board Vice Chairman Owner and Manager Brothers Precision Tool Co. Ronald T. Burleson Partner Thurman Burleson and Sons Farm Bill C. Burnside, DDS Sole Proprietor Dental Practice Charles F. Geschickter, III President and Chief Executive Officer ST Motorsports, Inc.; JTG Racing, Inc. Thomas M. Hearne, Jr. Geopavement Engineer NC Department of Transportation	Charles D. Horne President Hornwood, Inc. W. Kenneth Huntley President Huntley Oil & Gas Co., Inc. Joseph R. Kluttz, Jr. Secretary and Treasurer Albemarle Insurance Agency, Inc Lee Roy Lookabill, Jr. President Anson Real Estate and Insurance Co., Inc. W. Chester Lowder Director of Livestock Program Public Policy Division NC Farm Bureau Federation, Inc. Barry S. Moose Division Engineer NC Department of Transportation	Timothy J. Propst Executive Vice President Propst Construction Co., Inc. Susan J. Rourke President and Owner U.S. Land Management Co. Donald P. Scarborough Board Chairman President and Owner Plank Road Realty, Inc. John W. Shealy, Jr. President Capital Concrete Co. Edward B. Tyson Retired Superintendent of Kannapolis City Schools

Executive Officers
Roger L. Dick President and Chief Executive Officer Uwharrie Capital Corp Brendan P. Duffey Executive Vice President and Chief Operating Officer Uwharrie Capital Corp Robert O. Bratton Chief Financial Officer Uwharrie Capital Corp Barbara S. Williams Executive Vice President and Controller Uwharrie Capital Corp	Christy D. Stoner President and Chief Executive Officer The Strategic Alliance Corporation, BOS Agency, Inc. Chief Executive Officer Strategic Investment Advisors, Inc. Executive Vice President Marketing Uwharrie Capital Corp Jeffrey M. Talley President Strategic Investment Advisors, Inc.	Dana A. Maness President Anson Bank & Trust Co. W.D. “Bill” Lawhon, Jr. President and Chief Executive Officer Bank of Stanly Patricia K. Horton President and Chief Executive Officer Cabarrus Bank & Trust Company

Attached files

UWHARRIE CAPITAL CORP Reports

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