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

Attached files

file	filename
10-K - FORM 10-K - UWHARRIE CAPITAL CORP	d10k.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - UWHARRIE CAPITAL CORP	dex21.htm
EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - UWHARRIE CAPITAL CORP	dex23.htm
EX-31.1 - CERTIFICATE OF CEO PURSUANT TO SECTION 302 - UWHARRIE CAPITAL CORP	dex311.htm
EX-31.2 - CERTIFICATE OF PRINCIPLE FINANCIIAL OFFICER PURSUANT TO SECTION 302 - UWHARRIE CAPITAL CORP	dex312.htm
EX-32 - CERTIFICATION PURSUANT TO SECTION 906 - UWHARRIE CAPITAL CORP	dex32.htm
EX-99.C - PRINCIPLE FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 111(B)(4) - UWHARRIE CAPITAL CORP	dex99c.htm
EX-99.B - PRINCIPLE EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 111(B)(4) - UWHARRIE CAPITAL CORP	dex99b.htm

Exhibit 13

Uwharrie Capital Corp

2010

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, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard^® credit cards and a Visa^® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa^® and ATMs displaying the STAR^® or CIRRUS^® networks regionally and worldwide, respectively.

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 financial advisors registered with UVEST Financial Services Group, 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, is independent of Strategic Investment Group and Uwharrie Capital Corp. 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)	2010			2009			Percent Increase (Decrease)

For the year:
Net income	$	713		$	690			3.33	%
Net income available to common shareholders	$	68		$	48			41.67	%
Basic net income per common share	$	0.01		$	0.01			0.00	%
Diluted net income per common share	$	0.01		$	0.01			0.00	%

Weighted average common shares outstanding (diluted)		7,485,373			7,474,140			0.15	%

At year-end:
Total assets	$	535,426		$	477,846			12.05	%
Total earning assets		499,126			436,012			14.48	%
Loans held for investment		387,769			353,729			9.62	%
Total interest-bearing liabilities		433,739			385,433			12.53	%
Shareholders’ equity		43,493			44,024			(1.21	)%
Book value per common share	$	4.38		$	4.47			(2.01	)%

Averages for the year:
Total assets	$	514,425		$	471,729			9.05	%
Total earning assets		473,306			434,218			9.00	%
Loans held for investment		375,381			346,976			8.19	%
Total interest-bearing liabilities		414,373			378,411			9.50	%
Shareholders’ equity		45,425			43,182			5.19	%

Financial ratios (in percentage):
Return on average assets		0.14	%		0.15	%
Return on average shareholders’ equity		1.57	%		1.60	%
Average equity to average assets		8.83	%		9.15	%
Net interest margin (fully tax equivalent basis)		3.99	%		4.12	%
Allowance as % of loans at year-end		2.34	%		1.49	%
Allowance as % of nonperforming loans		45.03	%		93.71	%
Nonperforming loans to total loans		5.19	%		1.59	%
Nonperforming assets to total assets		4.14	%		1.89	%
Net loan charge-offs (recoveries) to average loans		0.31	%		0.24	%

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 2010 and 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, 2005, 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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes PLLC

Asheville, North Carolina

March 31, 2011

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009


	2010			2009
	(dollars in thousands)

ASSETS
Cash and due from banks	$	4,948		$	7,521
Interest-earning deposits with banks		8,676			3,338
Securities available for sale, at fair value		96,395			76,317
Loans held for sale		6,286			2,628
Loans:
Loans held for investment		387,769			353,729
Less allowance for loan losses		(9,067	)		(5,276	)

Net loans held for investment		378,702			348,453

Premises and equipment, net		14,554			13,646
Interest receivable		2,408			2,077
Federal Home Loan Bank stock		3,252			3,201
Bank owned life insurance		5,975			5,714
Goodwill		987			987
Other real estate owned		2,022			3,419
Prepaid assets		2,088			2,617
Other assets		9,133			7,928

Total assets	$	535,426		$	477,846


LIABILITIES
Deposits:
Demand noninterest-bearing	$	54,837		$	44,924
Interest checking and money market accounts		187,493			137,708
Savings deposits		37,624			32,120
Time deposits, $100,000 and over		59,431			64,736
Other time deposits		94,648			97,286

Total deposits		434,033			376,774

Short-term borrowed funds		20,482			26,940
Long-term debt		34,061			26,643
Interest payable		342			396
Other liabilities		3,015			3,069

Total liabilities		491,933			433,822


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		(300	)		(400	)
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		14,034			14,030
Unearned ESOP compensation		(692	)		(667	)
Undivided profits		10,124			10,056
Accumulated other comprehensive income		335			1,013

Total shareholders’ equity		43,493			44,024

Total liabilities and shareholders’ equity	$	535,426		$	477,846

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, 2010, 2009 and 2008


	2010			2009			2008
	(in thousands, except share and per share data)

Interest Income
Loans, including fees	$	21,616		$	21,246		$	22,780
Investment securities:
US Treasury		612			12			73
US Government agencies and corporations		1,896			3,106			1,853
State and political subdivisions		319			632			689
Other		—			—			84
Interest-earning deposits with banks and federal funds sold		44			66			85

Total interest income		24,487			25,062			25,564

Interest Expense
Interest checking and money market accounts		971			838			1,357
Savings deposits		327			255			301
Time deposits $100,000 and over		1,192			1,980			2,453
Other time deposits		1,684			2,836			3,828
Short-term borrowed funds		693			316			529
Long-term debt		1,084			1,472			1,360

Total interest expense		5,951			7,697			9,828

Net interest income		18,536			17,365			15,736
Provision for loan losses		4,919			1,732			969


Net interest income after provision for loan losses		13,617			15,633			14,767

Noninterest Income
Service charges on deposit accounts		2,219			2,360			2,238
Other service fees and commissions		2,883			2,273			2,777
Gain (loss) on sale of securities		1,484			(711	)		—
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		3,172			3,436			1,208
Other income		140			445			532

Total noninterest income		9,898			5,824			6,597

Noninterest Expense
Salaries and employee benefits		11,648			11,527			10,637
Net occupancy expense		1,193			1,071			987
Equipment expense		769			702			645
Data processing costs		853			792			789
Office supplies and printing		384			335			286
Foreclosed real estate expense		387			219			55
Professional fees and services		1,230			968			687
Marketing and donations		1,291			746			682
Electronic banking expense		811			728			792
Software amortization and maintenance		542			470			455
FDIC insurance		795			958			128
Other noninterest expense		2,748			2,414			2,388

Total noninterest expense		22,651			20,930			18,531

Income before income taxes		864			527			2,833
Income taxes		151			(163	)		804


Net income	$	713		$	690		$	2,029


Net income	$	713		$	690		$	2,029
Dividends on preferred stock		(645	)		(642	)		(13	)

Net Income available to common shareholders	$	68		$	48		$	2,016

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

Diluted	$	0.01		$	0.01		$	0.27

Weighted average common shares outstanding
Basic		7,485,373			7,474,140			7,482,488
Diluted		7,485,373			7,474,140			7,520,484

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, 2010, 2009 and 2008


	2010			2009			2008
	(in thousands)

Net Income	$	713		$	690		$	2,029


Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		390			1,637			(3,315	)
Related tax effect		(156	)		(621	)		1,281

Reclassification of losses (gains) recognized in net income		(1,484	)		711			—
Related tax effect		572			(274	)		—

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)		(678	)		2,563			(1,937	)


Comprehensive income	$	35		$	3,253		$	92

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, 2010, 2009 and 2008


	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, 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

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2010, 2009 and 2008


	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, 2009		7,593,929	$	10,000	$	500	$	(400	)	$	9,492	$	14,030	$	(667	)	$	10,056		$	1,013		$	44,024
Net income		—		—		—		—			—		—		—			713			—			713
Other comprehensive income		—		—		—		—			—		—		—			—			(678	)		(678	)
Release of ESOP shares		—		—		—		—			—		—		75			—			—			75
Increase in ESOP notes receivable		—		—		—		—			—		—		(100	)		—			—			(100	)
Stock compensation expense		—		—		—		—			—		4		—			—			—			4
Record preferred stock dividend and discount accretion		—		—		—		100			—		—		—			(645	)		—			(545	)


Balance, December 31, 2010		7,593,929	$	10,000	$	500	$	(300	)	$	9,492	$	14,034	$	(692	)	$	10,124		$	335		$	43,493

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, 2010, 2009 and 2008


	2010			2009			2008
Cash flows from operating activities
Net income	$	713		$	690		$	2,029
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		815			780			676
Net amortization of security premiums/discounts		412			134			(202	)
Impairment of securities available for sale		—			1,807			158
Net amortization of mortgage servicing rights		869			868			471
Impairment of foreclosed real estate		125			78			28
Provision for loan losses		4,919			1,732			969
Deferred income taxes		(1,091	)		(737	)		(728	)
Stock compensation		4			11			26
Net realized loss on sales / calls available for sale securities		(1,484	)		711			—
Income from mortgage loan sales		(3,172	)		(3,436	)		(1,208	)
Proceeds from sales of loans held for sale		110,374			144,761			55,198
Origination of loans held for sale		(111,973	)		(142,727	)		(54,328	)
(Gain) loss on sale of premises, equipment and other assets		71			(1	)		5
Loss on nonmarketable securities		—			172			—
Increase in cash surrender value of life insurance		(261	)		(203	)		(193	)
Loss on sales of foreclosed real estate		332			36			41
Release of ESOP Shares		75			69			78
Net change in interest receivable		(331	)		(50	)		28
Net change in other assets		(532	)		(3,652	)		83
Net change in interest payable		(54	)		(106	)		(94	)
Net change in other liabilities		(54	)		714			584

Net cash provided (used) by operating activities		(243	)		1,651			3,621

Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		53,013			30,353			14,386
Purchase of securities available for sale		(71,430	)		(36,208	)		(35,329	)
Net increase in loans		(34,866	)		(15,598	)		(21,837	)
Proceeds from sale of premises, equipment and other assets		—			1			—
Purchase of premises and equipment		(1,725	)		(3,298	)		(3,058	)
Proceeds from sales of foreclosed real estate		733			1,243			182
Investment in other assets		(240	)		(1,089	)		(569	)
Net increase in Federal Home Loan Bank stock		(51	)		(917	)		(147	)

Net cash used by investing activities		(54,566	)		(25,513	)		(46,372	)

Cash flows from financing activities
Net increase in deposit accounts		57,259			23,147			28,970
Net increase (decrease) in short-term borrowed funds		(6,458	)		4,691			(9,679	)
Net increase (decrease) in long-term debt		4,942			(5,859	)		3,392
Net proceeds from issuance of junior subordinated debt		2,476			—			7,419
Repurchases of common stock		—			—			(571	)
Net proceeds from issuance of preferred stock		—			—			10,000
Net proceeds from issuance of common stock		—			—			301
Tax benefit of stock options exercised		—			—			26
Increase in unearned ESOP compensation		(100	)		—			—
Dividend on preferred stock		(545	)		(542	)		(13	)
Cash paid for fractional shares		—			—			(7	)

Net cash provided by financing activities		57,574			21,437			39,838


Increase (decrease) in cash and cash equivalents		2,765			(2,425	)		(2,913	)
Cash and cash equivalents, beginning of period		10,859			13,284			16,197

Cash and cash equivalents, end of period	$	13,624		$	10,859		$	13,284


Supplemental disclosures of cash flow information
Interest paid	$	6,005		$	7,802		$	9,922
Income taxes paid		1,274			1,558			1,596
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		(1,094	)		2,563			(1,937	)
Loans transferred to foreclosed real estate		2,148			1,882			2,876
Company financed sales of other real estate owned		2,450			—			—
Mortgage servicing rights capitalized		1,113			1,465			563
Preferred stock dividend accrued		(68	)		(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. This company is currently inactive and does not affect the consolidated financials.

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 Stanly’s subsidiaries, BOS Agency and Strategic Alliance. 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 Available for Sale

Investment securities available for sale consist of bonds, mortgage backed securities and collateralized mortgage obligations (CMOs) 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 divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes, commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes, real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 impaired 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 both individually and collectively by loan class 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.

Smaller balances of homogeneous loans are collectively evaluated by loan class 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)

In the third quarter, the Company upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the new allowance model. The loans that are impaired and included in the specific reserve are excluded from these new calculations.

In the third quarter, our allowance for loan losses increased approximately $2.1 million, of which approximately $300,000 was related to a net increase in allowance on impaired loans.

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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.

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. The tax returns for the Company are subject to audit for the 2007 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.

Fair Value of Financial Instruments

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

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fairvalue on a nonrecurring basis, including impaired loans, loans held for sale, which are carried at the lower of cost or market, other real estate owned and loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; 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.

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 all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the underlying 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 underlying collateral is further impaired below the appraised value the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset 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 foreclosed asset as nonrecurring Level 3.

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.

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, 2010 and December 31, 2009, total accumulated other comprehensive income was $335,000 and $1.0 million, respectively, consisting of $334,512 and $1,012,648 of unrealized gains and temporary unrealized losses net of tax.

Earnings per Common Share

The Company issued 3% stock dividends in 2008. There was not a stock dividend in 2010 or 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 2010, 2009 and 2008 there were 180,571, 280,715 and 189,866 options outstanding that were anti-dilutive, respectively.

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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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


	2010			2009			2008

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

Effect of ESOP shares		(108,596	)		(119,829	)		(136,425	)


Adjusted weighted average number of common shares used in computing basic net income per common share		7,485,373			7,474,140			7,482,488

Effect of dilutive stock options		—			—			37,996


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		7,485,373			7,474,140			7,520,484

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, “Fair Value Measurements.” This update adds a new requirement to disclose transfers in and out of Level 1 and Level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of Level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around Level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for Level 1 and Level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for Level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for Level 1 and Level 2 transfers and the expanded qualitative disclosures had no impact on the Company’s financial position, results of operations, and EPS. The Company does not expect the adoption of the Level 3 disclosure requirements to have an impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued an Accounting Standards update (ASU No. 2010-20) entitled “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends ASC 820-10. The update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for the periods beginning on or after December 15, 2010.

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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Reclassification

Certain amounts in the 2009 and 2008 financial statements have been reclassified to conform to the 2010 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

Note 2 - Investment Securities

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


December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	51,622	$	746	$	1,220	$	51,148
U.S. Government agencies		24,862		766		165		25,463
Mortgage-backed securities and CMO’s		8,655		294		49		8,900
State and political subdivisions		10,725		267		108		10,884

Total securities available for sale	$	95,864	$	2,073	$	1,542	$	96,395


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

At both December 31, 2010 and 2009, the Company owned Federal Reserve stock reported at cost of $778,850 and is included in other assets. Also at December 31, 2010 and 2009, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.3 million and $3.2 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, 2010, 2009 and 2008 are as follows:


	2010			2009			2008
	(dollars in thousands)
Gross proceeds from sales and calls	$	40,623		$	9,535		$	—


Realized gains from sales	$	1,960		$	219		$	—
Realized losses from sales		(476	)		(930	)		—

Net realized gains (losses)	$	1,484		$	(711	)	$	—

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

At December 31, 2010, 2009 and 2008 securities available for sale with a carrying amount of $40.7 million, $11.4 million and $13.2 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, 2010 and 2009. 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 credit quality of the investments. At December 31, 2010, the unrealized losses related to six U.S. Treasury Notes, two U.S. Government Agencies, three mortgage backed securities and eight North Carolina municipal bonds.


	Less than 12 Months				12 Months or More				Total
December 31, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	26,138	$	1,220	$	—	$	—	$	26,138	$	1,220
U.S. Gov’t agencies		5,736		165		—		—		5,736		165
Mortgage-backed securities and CMO’s		2,900		49		—		—		2,900		49
State and political subdivisions		4,522		108		—		—		4,522		108

	$	39,296	$	1,542	$	—	$	—	$	39,296	$	1,542


	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	$	—

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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

The following table shows contractual maturities of the investment portfolio as of December 31, 2010:


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)

Due within one year	$	2,080	$	2,102
Due after one but within five years		23,761		24,711
Due after five but within ten years		59,365		58,671
Due after ten years		2,003		2,011
Mortgage backed securities		8,655		8,900

	$	95,864	$	96,395

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


	2010			2009
	(dollars in thousands)

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


Balance, end of year	$	—		$	1,807

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2010 and 2009 is as follows:


	2010			2009
	(dollars in thousands)
Commercial
Commercial	$	51,679		$	51,723
Real estate - commercial		105,123			95,938
Other real estate construction loans		52,270			40,327
Noncommercial
Real estate 1-4 family construction		4,332			4,649
Real estate - residential		103,781			97,852
Home equity		52,034			46,303
Consumer loans		17,721			16,627
Other loans		739			172

		387,679			353,591
Less:
Allowance for loan losses		(9,067	)		(5,276	)
Deferred loan (fees) costs, net		90			138


Loans held for investment, net	$	378,702		$	348,453

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 40.19% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development,

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 - Loans Held for Investment (Continued)

commercial buildings and equipment that comprise 27.12% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $43.3 million and $24.1 million at December 31, 2010 and 2009, respectively. The nonaccrual status of these loans had the effect of reducing net income by $646,078 in 2010 and $246,395 in 2009. Of the $43.3 million in impaired loans at December 31, 2010, $12.5 million were in the commercial segment and carried allowances totaling $3.6 million while $4.4 million were in the noncommercial segment and carried allowances totaling $1.0 million. The commercial segment had $19.5 million evaluated and required no specific allowance while the noncommercial segment had $6.8 million evaluated and required no specific allowance. 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 required no specific allowance. There were loans 90 days past due and still accruing of $407,223 and $298,635 at December 31, 2010 and 2009, respectively.

Restructured loans at December 31, 2010 totaled $5.1 million of which $4.6 million are included in impaired loans above. The carrying value of foreclosed properties held as other real estate was $2.0 million and $3.4 million at December 31, 2010 and 2009, 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, 2010, 2009 and 2008 are presented below:


	2010			2009			2008
	(dollars in thousands)
Balance, beginning of year	$	5,276		$	4,361		$	3,510
Charge-offs		(1,189	)		(871	)		(288	)
Recoveries		44			54			170
Other		17			—			—
Provision charged against income		4,919			1,732			969


Balance, end of year	$	9,067		$	5,276		$	4,361

The following table is the breakout of allowance for loss by loan class at December 31, 2010:


	Beginning Balance		Provisions			Other		Chargeoffs			Recoveries		Ending Balance
	(dollars in thousands)

Commercial	$	449	$	569		$	4	$	(59	)	$	3	$	966
Real estate - commercial		1,541		1,216			10		(527	)		—		2,240
Other real estate construction		1,205		952			—		—			—		2,157
Real estate construction		168		(58	)		—		(78	)		1		33
Real estate - residential		1,264		614			—		(222	)		2		1,658
Home equity		213		854			—		(97	)		1		971
Consumer loan		436		714			3		(206	)		37		984
Other loans		—		58			—		—			—		58


Total	$	5,276	$	4,919		$	17	$	(1,189	)	$	44	$	9,067

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The following table shows period-end loans and reserve balances by loan class both individually and collectively evaluated for impairment at December 31, 2010:


	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Ending Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	399	$	1,439	$	567	$	50,240	$	966	$	51,679
Real estate - commercial		1,384		20,321		856		84,802		2,240		105,123
Other real estate construction		1,818		10,355		339		41,915		2,157		52,270
Real estate construction		—		950		33		3,382		33		4,332
Real estate - residential		762		8,884		896		94,897		1,658		103,781
Home equity		136		1,065		835		50,969		971		52,034
Consumer loan		132		241		852		17,480		984		17,721
Other loans		—		—		58		739		58		739


Total	$	4,631	$	43,255	$	4,436	$	344,424	$	9,067	$	387,679

Past due loan information is used by management when assessing the adequacy of the allowance for loan loss. The following table summarizes the past due information of the loan portfolio by class:


	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)

Commercial	$	666	$	501	$	1,167	$	50,512	$	51,679	$	—
Real estate - commercial		1,728		8,702		10,430		94,693		105,123		—
Other real estate construction		206		7,975		8,181		44,089		52,270		—
Real estate 1 - 4 family construction		—		500		500		3,832		4,332		—
Real estate - residential		1,648		2,337		3,985		99,796		103,781		397
Home equity		110		75		185		51,849		52,034		—
Consumer loans		267		46		313		17,408		17,721		10
Other loans		—		—		—		739		739		—
Deferred cost / fees		—		—		—		90		90		—


Total	$	4,625	$	20,136	$	24,761	$	363,008	$	387,769	$	407

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The composition of nonaccrual loans by class as of December 31, 2010 and 2009 is as follows:


	2010		2009
	(dollars in thousands)

Commercial	$	501	$	25
Real estate - commercial		8,702		58
Other real estate construction		7,975		4,461
Real estate 1 - 4 family construction		500		85
Real estate - residential		1,940		760
Home equity		75		115
Consumer loans		36		125
Other loans		—		—

	$	19,729	$	5,629

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

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

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

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

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

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The table below summarizes risk grades of the loan portfolio by class:


	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	50,108	$	185	$	1,386	$	—	$	51,679
Real estate - commercial		81,410		4,520		18,455		738		105,123
Other real estate construction		41,709		301		10,260		—		52,270
Real estate 1 - 4 family construction		3,381		—		951		—		4,332
Real estate - residential		94,077		1,787		7,917		—		103,781
Home equity		50,902		158		974		—		52,034
Consumer loans		17,458		102		129		32		17,721
Other loans		739		—		—		—		739


Total	$	339,784	$	7,053	$	40,072	$	770	$	387,679

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following table shows the breakdown between performing and nonperforming loans by class:


	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	51,178	$	501	$	51,679
Real estate - commercial		96,421		8,702		105,123
Other real estate construction		44,295		7,975		52,270
Real estate 1 - 4 family construction		3,832		500		4,332
Real estate - residential		101,444		2,337		103,781
Home equity		51,959		75		52,034
Consumer loans		17,675		46		17,721
Other loans		739		—		739


Total	$	367,543	$	20,136	$	387,679

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


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment
	(dollars in thousands)

Commercial	$	1,439	$	918	$	521	$	399	$	1,485
Real estate - commercial		21,985		16,088		4,233		1,384		13,279
Other real estate construction		10,357		2,585		7,770		1,818		9,380
Real estate 1 - 4 family construction		950		950		—		—		1,100
Real estate - residential		8,884		5,118		3,766		762		7,257
Home Equity loans		1,066		677		388		136		821
Consumer loans		241		23		218		132		367
Other loans		—		—		—		—		—


Total	$	44,922	$	26,359	$	16,896	$	4,631	$	33,689

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 $327 million and $289 million at December 31, 2010 and 2009, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:


	2010			2009			2008
	(dollars in thousands)

Beginning of year mortgage servicing rights:	$	1,890		$	1,293		$	1,321
Amounts capitalized		1,113			1,465			563
Amortization		(869	)		(868	)		(471	)
Impairment		—			—			(120	)


End of year	$	2,134		$	1,890		$	1,293

Amortization expense is estimated as follows:


Year ending December 31,
(dollars in thousands)
2011	$	504
2012		436
2013		369
2014		301
2015		233
Thereafter		291

Total	$	2,134

The amortization does not anticipate or pro-forma loan prepayments.

Note 6 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2010 and 2009 are listed below:


	2010		2009
	(dollars in thousands)

Land	$	4,081	$	4,081
Building and improvements		11,205		10,012
Furniture and equipment		6,128		5,598

		21,414		19,691
Less accumulated depreciation		6,860		6,045

Total	$	14,554	$	13,646

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 had 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 entered into a month to month lease in 2009 with annual lease payments of $600. Bank of Stanly had also entered into a noncancelable operating lease for a branch location in Locust that expired in 2010 with annual rental payments of $41,856. Bank of Stanly terminated the Locust lease in the third quarter of 2010 when the branch moved into a new building Stanly had constructed. 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, 2010 are as follows:


Year ending December 31,
(dollars in thousands)

2011	$	60
2012		60
2013		60
2014		60
2015		60
Thereafter		100

Total	$	400

Total rental expense related to the operating leases was $85,538, $106,350, and $120,281 for the years ended December 31, 2010, 2009 and 2008, respectively, and is included in occupancy expense.

Note 8 - Deposits

The composition of deposits at December 31, 2010 and 2009 is as follows:


	2010					2009
	Amount		Percentage of Total			Amount		Percentage of Total
	(dollars in thousands)

Demand deposits	$	54,837		13	%	$	44,924		12	%
Interest checking and money market		187,493		43	%		137,708		37	%
Savings		37,624		8	%		32,120		8	%
Time deposits $100,000 and over		59,431		14	%		64,736		17	%
Other time deposits		94,648		22	%		97,286		26	%

Total	$	434,033		100	%	$	376,774		100	%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 - Deposits (Continued)

The maturities of fixed-rate time deposits at December 31, 2010 are reflected in the table below:


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

2011	$	39,225	$	62,597
2012		6,788		9,698
2013		7,755		12,595
2014		748		3,363
2015		4,915		6,395
Thereafter		—		—

Total	$	59,431	$	94,648

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 2010 and 2009:


	2010					2009
	Amount		Rate			Amount		Rate
	(dollars in thousands)
At year-end
Federal funds purchased	$	—		0.00	%	$	—		0.00	%
Securities sold under repurchase agreements		—		0.00	%		—		0.00	%
Master notes and other short term borrowing		10,423		0.94	%		11,482		0.50	%
Notes payable		59		3.82	%		58		3.80	%
Short-term line of credit		—		0.00	%		—		0.00	%
Short-term advances from FHLB		10,000		4.42	%		15,400		0.36	%

	$	20,482		2.64	%	$	26,940		0.42	%


	2010					2009
	Amount		Rate			Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	7		1.17	%	$	273		1.05	%
Securities sold under repurchase agreements		—		0.00	%		669		0.89	%
Master notes and other short term borrowing		11,174		0.95	%		11,298		0.83	%
Notes payable		58		3.76	%		56		3.25	%
Short-term line of credit		—		0.00	%		724		1.68	%
Short-term advances from FHLB		15,272		3.83	%		11,401		1.70	%

	$	26,511		2.62	%	$	24,421		1.29	%


	2010		2009
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	300	$	1,250
Securities sold under repurchase agreements		—		1,740
Master notes and other short term borrowing		13,454		12,559
Notes payable		58		58
Short-term line of credit		—		2,600
Short-term advances from FHLB		23,920		24,275

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 and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place and borrowings secured by the Uwharrie Loan Pool.

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 $27.5 million at December 31, 2010.

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 $72.9 million at December 31, 2010. The long-term advances under this line amounted to $24.0 million and $19.0 million at December 31, 2010 and 2009, respectively. Interest rates ranged from 1.15% to 4.46% in 2010 and from 1.57% to 5.50% in 2009. The 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 $7.2 million at December 31, 2010.

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 have a final maturity date of June 30, 2015 and may be redeemed by the Company after June 30, 2010. 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, 2010. Once the final maturity drops under five years, the Company must impose a twenty percent reduction per year of the amount of the proceeds from the sale of these securities that is eligible to be counted as Tier 2 capital. At December 31, 2010 $1.5 million of the $7.4 million was excluded as Tier 2 capital. These securities will be redeemed on March 31, 2011 and replaced with a new issue for subordinated debt securities discussed below.

During the third quarter of 2010, the Company began a private placement of up to 10,000 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 December 31, 2013 and have a final maturity date is December 31, 2018. The junior subordinated debt securities pay 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 December 31, 2010 the Company had raised and had outstanding $2.5 million of this private placement.

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 $74,456 at December 31, 2010.

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 $150,000 at December 31, 2010.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 - Long-Term Debt (Continued)

As of December 31, 2010, the scheduled maturities of these advances and notes payable are as follows:


Year ending December 31,
(dollars in thousands)
2012	$	13,059
2013		9,560
2014		1,511
2015		7,430
2016		2,501
Thereafter		—

Total	$	34,061

Note 11 - Income Tax Matters

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


	2010			2009			2008
	(dollars in thousands)
Current tax expense:
Federal	$	1,021		$	428		$	1,225
State		221			146			307

Total		1,242			574			1,532


Deferred tax expense (benefit):
Federal		(891	)		(620	)		(607	)
State		(200	)		(117	)		(121	)

Total		(1,091	)		(737	)		(728	)


Net provision for income taxes	$	151		$	(163	)	$	804

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:


	2010			2009			2008
	(dollars in thousands)

Tax computed at the statutory federal rate	$	294		$	179		$	963
Increases (decrease) resulting from:
Tax exempt interest, net		(179	)		(269	)		(267	)
State income taxes, net of federal benefit		14			19			123
Other		22			(92	)		(15	)

Provision for income taxes	$	151		$	(163	)	$	804

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)


	2010			2009			2008
	(dollars in thousands)
Deferred tax assets relating to:
Net unrealized loss on securities available for sale	$	—		$	—		$	979
Allowance for loan losses		3,253			1,772			1,305
Deferred compensation		518			635			494
Other		198			462			126


Total deferred tax assets		3,969			2,869			2,904

Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		(197	)		(613	)		—
Premises and equipment		(381	)		(371	)		(301	)
Deferred loans fees and costs		(212	)		(214	)		(213	)
Loan servicing		(186	)		(158	)		(41	)
Prepaid expenses		(130	)		(157	)		(138	)
Other		—			—			—

Total deferred tax liabilities		(1,106	)		(1,513	)		(693	)

Net recorded deferred tax asset	$	2,863		$	1,356		$	2,211

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, 2010 and 2009, outstanding financial instruments whose contract amounts represent credit risk were as follows:


	2010		2009
	(dollars in thousands)

Commitments to extend credit	$	82,455	$	91,648
Credit card commitments		8,790		8,697
Standby letters of credit		1,626		881

	$	92,871	$	101,226

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.

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, 2009	$	14,789
Disbursements during the year		11,091
Collections during the year		(7,648	)


Balance at December 31, 2010	$	18,232

At December 31, 2010, the Company had approved, but unused lines of credit, totaling $5.0 million to executive officers and directors, 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, 2010

Total Capital to Risk
Weighted Assets:
Consolidated	$	55,534		14.4	%	$	30,793		8.0	%	$	N/A		—	%
Bank of Stanly		32,520		12.6	%		20,590		8.0	%		25,738		10.0	%
Anson Bank and Trust		5,276		13.8	%		3,050		8.0	%		3,812		10.0	%
Cabarrus Bank and Trust		12,697		13.3	%		7,623		8.0	%		9,529		10.0	%

Tier I Capital to Risk
Weighted Assets:
Consolidated		42,171		11.0	%		15,396		4.0	%		N/A		—	%
Bank of Stanly		29,263		11.4	%		10,295		4.0	%		15,443		6.0	%
Anson Bank and Trust		4,793		12.6	%		1,525		4.0	%		2,287		6.0	%
Cabarrus Bank and Trust		11,500		12.1	%		3,811		4.0	%		5,717		6.0	%

Tier I Capital to
Average Assets:
Consolidated		42,171		7.8	%		21,615		4.0	%		N/A		—	%
Bank of Stanly		29,263		8.4	%		13,956		4.0	%		17,445		5.0	%
Anson Bank and Trust		4,793		8.4	%		2,274		4.0	%		2,842		5.0	%
Cabarrus Bank and Trust		11,500		8.9	%		5,184		4.0	%		6,480		5.0	%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	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	%	$	N/A		—	%
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	%		N/A		—	%
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	%		N/A		—	%
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	%

As of December 31, 2010, the most recent notification from the Federal Deposit Insurance Corporation categorized all of the Company’s 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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years. At December 31, 2010 the remaining discount was $300,000.

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, 2010, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.0 million in Anson and $3.0 million in Cabarrus.

The Company and its subsidiaries must receive Federal Reserve approval before paying common and preferred stock dividends.

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, 2010, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $2.9 million as reserves on deposit liabilities.

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 or 2010.

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the Capital Purchase Program (“CPP”), the Company must obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or otherwise or to pay a cash dividend.

Note 15 - Stock Based Compensation

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, 2010, the SOP had 168,211 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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Stock Based Compensation (Continued)

within two years of the grant date. At December 31, 2010, the SOP II had 12,360 shares outstanding and the SPP II had no options outstanding.

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2010:


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

Options outstanding at the beginning of the year		280,715		$	4.75	$	—

Options granted		—			—
Options exercised		—			—
Forfeitures		(100,144	)		4.48


Options outstanding at the end of the year		180,571		$	4.90	$	—


Options exercisable at the end of the year		173,155		$	4.88	$	—

Total options outstanding at December 31, 2010 were 180,571 at an exercise price range of $4.00 to $5.60 per share with a weighted average expected term of 2.35 years. Exercisable options at December 31, 2010 were 173,155 options at an exercise price range of $4.00 to $5.60 per share. At December 31, 2010, 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 years ended December 31, 2010 and 2009 under the SOP II. There were 12,360 shares granted in 2008.

A summary of the status of the Company’s non-vested stock options as of December 31, 2010, and changes during the year then ended is presented below:


	Shares			Weighted Average Grant Date Fair Value
Non-vested December 31, 2009		9,888		$	1.60
Granted		—			—
Vested		(2,472	)		1.60
Forfeited		—			—

Non-vested December 31, 2010		7,416			1.60

The grant date fair value of stock options vested over the years ended December 31, 2010, 2009 and 2008 was $3,960, $26,438 and $22,478 respectively.

As of December 31, 2010, there was $8,328 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 2.3 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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Stock Based Compensation (Continued)

For the twelve months ended December 31, 2008 the intrinsic value of options exercised was $74,409. There were no options exercised in 2009 or 2010.

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 are eligible to make elective deferrals on the first day if calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $296,466 in 2010, $210,884 in 2009 and $206,478 in 2008, determined as follows:

•

The Company will contribute a safe harbor matching contribution in an amount equal to :(i) 100% of the matched employee contributions that are not in excess of 3% of compensation, plus (ii) 50% of the amount of the matched employee contributions that exceed 3% of compensation, but do not exceed 5% of compensation.

•

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 was terminated in 2009 and all funds have been disbursed. Expense for the years ended December 31, 2009 and 2008 was $12,078 and $12,298, 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, 2010, the outstanding balance of the loan is $591,925 and is presented as a reduction of shareholders’ equity.

At the debt payments are made on the loans, shares associated with those debt payments are released to the ESOP and 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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Employee and Director Benefit Plans (Continued)

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.

The Company established a $500,000 line of credit to the ESOP in the third quarter of 2010 for the purpose of purchasing shares for the ESOP plan. An advance of $100,000 was made under this line of credit, and a total of 18,906 unallocated shares were purchased from the open market from the advance proceeds and pledged as collateral. The remaining amount under this advance available to purchase shares was $35,414 at December 31, 2010. The unused balance of the line of credit at December 31, 2010 was $400,000. This amount is available for future advances to purchase stock for the ESOP plan. At December 31, 2010, the outstanding balance of the loan is $100,000 and is presented as a reduction of shareholders’ equity.

During 2010 the Company expensed approximately 2% of salaries as a contribution to the ESOP Plan compared to 3% contributed in 2009 and 2008. The reduction in the percentage contributed was due to an increase in contributions to the Employees’ Savings Plus and Profit Sharing Plan which was increased from a maximum match of 3% to a maximum match of 4% of associate contributions. Expenses of $229,011, $350,068 and $326,633 during the years ended December 31, 2010, 2009 and 2008, respectively, were incurred in connection with the ESOP.

At December 31, 2010, 369,602 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. There were 116,642 shares unallocated with a fair value of approximately $416,412 at December 31, 2010.

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 2010, 2009 and 2008 a provision of $266,800, $500,800 and $383,800, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation deferred under the plan amounts to $1.7 million and $2.0 million at December 31, 2010 and 2009, respectively.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Employee and Director Benefit Plans (Continued)

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 2010 and 2009, the expense associated with these policies was $(12,322) and $35,829, respectively.

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 at December 31, 2010 and 2009, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which 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, 2010 and 2009:


	2010				2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	13,624	$	13,630	$	10,859	$	10,896
Securities available for sale		96,395		96,395		76,317		76,317
Loans held for investment, net		387,769		392,017		348,453		363,619
Loans held for sale		6,286		6,286		2,628		2,628
FHLB Stock and FRB Stock		4,031		4,031		3,980		3,980
Bank-owned life insurance		5,975		5,975		5,714		5,714
Mortgage servicing rights		2,134		2,522		1,890		2,193
Accrued interest receivables		2,408		2,408		2,077		2,077

Financial Liabilities
Deposits	$	434,033	$	439,298	$	376,774	$	400,997
Short-term borrowings		20,482		20,482		26,940		26,940
Long-term debt		34,061		35,625		26,643		28,173
Accrued interest payable		342		342		396		396

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The carrying amount of cash and cash equivalents, which includes $750,000 in time deposits with other institutions 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. It is not practicable to determine fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability so it is presented at its carrying value. The carrying amount of bank-owned life insurance is the current cash surrender value. Fair value for mortgage servicing assets is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

The following methods and assumptions were used by the Company in estimating the fair value of 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 does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

•

Deposits – The fair value of checking, savings and money market deposits is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analysis using offered market rates. The fair value of deposits does not consider any customer related intangibles.

•

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 analysis using offered market rates. The fair value of the unsecured debt does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

At December 31, 2010, 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.

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 fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:


	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	51,148	$	51,148	$	—	$	—
US Gov’t		25,463		25,463		—		—
Mortgage-backed securities and CMO’s		8,900		—		8,900		—
State and political subdivisions		10,884		—		10,884		—


Total assets at fair value	$	96,395	$	76,611	$	19,784	$	—


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


	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	$	—	$	—	$	—	$	—

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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.

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, 2010 and December 31, 2009:


	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	12,265	$	—	$	—	$	12,265
Loans held for sale		6,286		—		6,286		—
Other real estate owned		275		—		—		275
Mortgage servicing rights		2,522		—		—		2,522


Total assets at fair value	$	21,348	$	—	$	6,286	$	15,062

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


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

Impaired loans	$	13,519	$	—	$	—	$	13,519
Loans held for sale		2,628		—		2,628		—
Other real estate owned		3,419		—		—		3,419
Mortgage servicing rights		2,193		—		—		2,193


Total assets at fair value	$	21,759	$	—	$	2,628	$	19,131

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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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,
	2010		2009
	(dollars in thousands)
Assets
Cash and demand deposits with bank subsidiaries	$	859	$	408
Interest-earning deposits with bank subsidiaries		11,271		12,030
Investments in:
Bank subsidiaries		46,878		47,908
Nonbank subsidiaries		704		358
Other assets		2,612		2,556

Total assets	$	62,324	$	63,260


Liabilities and shareholders’ equity
Master notes	$	8,594	$	11,482
Junior subordinated debentures		9,895		7,419
Other liabilities		342		335
Shareholders’ equity		43,493		44,024

Total liabilities and shareholders’ equity	$	62,324	$	63,260

Condensed Statement of Operations


	2010			2009			2008
	(dollars in thousands)

Equity in earnings of subsidiaries	$	1,445		$	1,260		$	2,738
Interest income		50			113			133
Management and service fees		6,407			5,468			4,464
Other income		26			91			94
Interest expense		(479	)		(533	)		(535	)
Other operating expense		(7,003	)		(6,122	)		(5,230	)
Income tax benefit		267			413			365


Net income	$	713		$	690		$	2,029


Net income	$	713		$	690		$	2,029
Dividends – preferred stock		(645	)		(642	)		(13	)

Net Income available to common shareholders	$	68		$	48		$	2,016


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

Diluted	$	0.01		$	0.01		$	0.27


Weighted average shares outstanding
Basic		7,485,373			7,474,140			7,482,488
Diluted		7,485,373			7,474,140			7,520,484

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows


	2010			2009			2008
	(dollars in thousands)
Cash flows from operating activities
Net income	$	713		$	690		$	2,029
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Equity in earnings of subsidiaries		(1,445	)		(1,260	)		(2,738	)
(Increase) decrease in other assets		74			(753	)		(2,012	)
Increase (decrease) in other liabilities		7			(30	)		(72	)

Net cash provided (used) by operating activities		(651	)		(1,353	)		(2,793	)


Cash flows from investing activities
Dividends received from subsidiaries		1,300			900			200

Net cash provided by investing activities		1,300			900			200


Cash flows from financing activities
Net increase (decrease) in master notes		(2,888	)		2,579			(727	)
Net increase (decrease) in long-term debt		—			(2,600	)		(4,000	)
Net proceeds from issuance of junior subordinated debentures		2,476			—			7,419
Repurchase of common stock		—			—			(571	)
Net proceeds from issuance of preferred stock		—			—			10,500
Proceeds from issuance of common stock		—			—			301
Preferred stock purchased from bank subsidiaries		—			—			(7,000	)
Dividends on preferred stock		(545	)		(542	)		(13	)
Tax benefit of stock options exercised		—			—			26
Cash paid for fractional shares		—			—			(7	)

Net cash provided (used) by financing activities		(957	)		(563	)		5,928


Net increase (decrease) in cash and cash equivalents		(308	)		(1,016	)		3,335
Cash and cash equivalents at beginning of period		12,438			13,454			10,119

Cash and cash equivalents at end of period	$	12,130		$	12,438		$	13,454

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(in thousands except per share and shares outstanding information)


	2010			2009			2008			2007			2006
Summary of Operations
Interest income	$	24,487		$	25,062		$	25,564		$	26,909		$	24,353
Interest expense		5,951			7,697			9,828			11,876			10,702

Net interest income		18,536			17,365			15,736			15,033			13,651
Provision for loan losses		4,919			1,732			969			15			298
Noninterest income		9,898			5,824			6,597			6,590			5,469
Noninterest expense		22,651			20,930			18,531			17,362			15,918
Income tax expense(benefit)		151			(163	)		804			1,287			833

Net income	$	713		$	690		$	2,029		$	2,959		$	2,071


Per Common Share
Net income – basic (1)	$	0.01		$	0.01		$	0.27		$	0.39		$	0.27
Net income – diluted (1)		0.01			0.01			0.27			0.39			0.26
Book value (1)		4.38			4.47			4.11			4.14			3.76

Weighted Average Shares
Outstanding:
Basic (1)		7,485,373			7,474,140			7,482,488			7,603,494			7,685,978
Diluted (1)		7,485,373			7,474,140			7,520,484			7,706,832			7,802,102
Ratios
Return on average assets		0.14	%		0.15	%		0.48	%		0.75	%		0.56	%
Return on average equity		1.57	%		1.60	%		6.29	%		9.73	%		7.32	%
Average equity to average assets		8.83	%		9.15	%		7.63	%		7.73	%		7.67	%

Selected Year-end Balances
Assets	$	535,426		$	477,846		$	452,468		$	411,944		$	383,261
Loans held for investment		387,769			353,729			340,830			321,987			288,135
Securities		96,395			76,317			68,835			51,005			37,150
Deposits		434,033			376,774			353,627			324,657			309,600
Borrowed funds		54,543			53,583			54,751			53,619			42,329
Shareholders’ equity		43,493			44,024			41,233			31,574			29,633

Selected Average Balances
Assets	$	514,425		$	471,729		$	422,857		$	393,188		$	368,781
Loans held for investment		375,381			346,976			335,791			308,149			293,394
Securities		86,780			78,049			48,926			41,188			35,227
Deposits		406,304			369,957			337,384			312,261			289,742
Borrowed funds		58,291			55,084			50,643			48,075			48,510
Shareholders’ equity		45,425			43,182			32,245			30,402			28,299

(1)	Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2006 through 2008 have been adjusted to reflect 3% stock dividends issued in 2008, 2007 and 2006. There was not a stock dividend issued in 2010 or 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 8 – 49 of this Annual Report. 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, 2010 and December 31, 2009

The Company’s total assets increased $57.6 million or 12.1% from $477.8 million at December 31, 2009 to $535.4 million at December 31, 2010. This increase resulted primarily from a $34.1 million increase in loans held for investment and a $20.1 million increase in securities available for sale.

Cash and cash equivalents increased $2.8 million during the year ended December 31, 2010. Cash and due from banks declined $2.6 million, while interest-earning deposits with banks increased $5.3 million.

Investment securities increased $20.1 million or 26.3%, from $76.3 million at December 31, 2009 to $96.4 million at December 31, 2010. At December 31, 2009 the Company owned $7.5 million in private label CMOs. With the continued erosion in the underlying collateral, management made the decision to sell the entire private label CMO portfolio during the first quarter of 2010 resulting in a realized loss of $107,000. During the year as the Company’s loan demand continued to grow along with the need to fund outstanding construction loan commitments, the Company recognized the need to increase its liquidity. The Company made the decision to sell $32.0 million in investments realizing gains of $1.5 million. The Company also had calls on state and political subdivision securities totaling $1.5 million and generating net gains of $25,000. During the year, the Company purchased $71.4 million in new securities, reinvesting the proceeds from the aforementioned sales and calls and the influx of cash from the increase in deposits during the period. The Company evaluated its entire investment portfolio for other than temporary impairments. Management believes that all of the unrealized losses totaling $1.5 million are only temporary. All other investments in the portfolio reflect gains of $2.1 million. At December 31, 2010, the Company had net unrealized gains of $531,000.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Loans held for investment increased $34.1 million from $353.7 million at December 31, 2009 to $387.8 million at December 31, 2010. The Company experienced positive growth trends in all areas of the loan portfolio except commercial and real estate 1-4 family construction, which decreased $44,000 and $317,000, respectively. Commercial real estate, other real estate construction and residential real estate increased at a growth rate of 9.6%, 29.6% and 6.1%, respectively. A portion of the increase in other real estate construction lending was related to funding on existing commitments. Loans held for sale increased 139.2% or $3.7 million compared to the prior year. The allowance for loan losses was $9.1 million at December 31, 2010, which represents 2.34% of the loan portfolio, an increase from $5.3 million or 1.49% at December 31, 2009.

Premises and equipment increased $908,000 or 6.7% during 2010. The Company completed the construction of a new branch in Locust during 2010.

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 $261,000 and $331,000 respectively, while other real estate owned decreased $1.4 million. The Company was able to sell several foreclosed properties held in other real estate owned during 2010, realizing net losses of $332,000 from these sales. Federal Home Loan Bank stock increased $51,000 because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings. The Company’s required ownership in Federal Reserve Bank stock remained at $779,000 during the year. Other assets increased $1.2 million for the year, primarily related to an increase in deferred tax assets.

Customer deposits continued to be our principal funding source in 2010, allowing us to fund the growth in assets discussed above. At December 31, 2010, deposits from our customers totaled $434.0 million, an increase of $57.2 million, or 15.2%, from $376.8 million at December 31, 2009. Demand noninterest bearing checking increased $9.9 million, while interest checking and money market accounts increased $49.8 million for the period. A portion of this increase is attributed to approximately $18.0 million in new public funds from one relationship and also from a shift from time deposits to money market accounts. Savings deposits grew $5.5 million. Time deposits over $100,000 and other time deposits declined $5.3 million and $2.6 million respectively during 2010, primarily from a shift to other deposit accounts.

During 2010 the Company’s net borrowings increased by $960,000. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2010, $34.0 million of the total borrowings of $54.5 million were attributed to Federal Home Loan Bank advances. During the fourth quarter of 2010, the Company began a second junior subordinated debt offering. At December 31, 2010 an additional $2.5 million had been raised. See note 10 for additional information on the new offering.

At December 31, 2010, total shareholders’ equity was $43.5 million, a decrease of $531,000 from December 31, 2009. Net income for the period was $713,000. Net income was offset by a net increase in unearned ESOP compensation of $25,000. The ESOP trust set up a new line of credit with the Company to be used to purchase shares for the ESOP.Net income was also offset as the Company recorded $545,000 in dividends on its series A and B preferred stock for the twelve month period. Unrealized gains on investment securities also declined $678,000 during the year as a result of the realized gains taken on the aforementioned investment sales. At December 31, 2010, 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, 2010 and 2009

Earnings

Uwharrie Capital Corp reported net income of $713,000 for the twelve months ended December 31, 2010, as compared to $690,000 for the twelve months ended December 31, 2009, an increase of $23,000. Net income available to common shareholders was $68,000 or $0.01 per common share at December 31, 2010, compared to $48,000 or $0.01 per common share at December 31, 2009. 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 $1.2 million to $18.5 million for 2010 compared to the $17.4 million earned in 2009. During the year ended December 31, 2010 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $1.9 million. The average yield on our interest-earning assets decreased 64 basis points to 5.25%, while the average rate we paid for our interest-bearing liabilities decreased 59 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 a decrease of five basis points in our interest rate spread, from 3.86% in 2009 to 3.81% in 2010. Our net interest margin for 2010 was 3.99%, compared to 4.12% in 2009. Financial Table 1 on page 62 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 63 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 $4.9 million and $1.7 million for the twelve months ended December 31, 2010 and 2009 respectively. There were net loan charge-offs of $1.1 million for the twelve months ended December 31, 2010 as compared with net loan charge-offs of $817,000 during the same period of 2009. Refer to the Asset Quality discussion beginning on page 56 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

increased 70.0%, from $5.8 million in 2009 to $9.9 million in 2010, an increase of $4.1 million. The Company benefited from another strong year of income from mortgage loan sales. Income from mortgage loan sales was $3.2 million for 2010 compared to $3.4 million during 2009, a decrease of $264,000. Mortgage loan rates continued to be attractive for buyers and rates did decline during 2010 allowing customers to be able to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $2.2 million, a decrease of 6.0%. These decreases were offset by an increase in other service fees and commissions of $610,000 generated from brokerage commissions and asset management fees which increased $270,000 to $1.5 million and other banking fees which increased $340,000 during 2010. The recent downturn in the economy that impacted the overall stock market and customer’s confidence to actively trade during 2009 began to turn around in 2010 attributing to the growth in brokerage commissions and asset management fees. The Company realized gains of $1.5 million on the securities available for sale compared to realized losses of $711,000 in 2009. As previously discussed, the Company did not have other-than-temporary impairment during 2010 compared to $1.8 million 2009.

Noninterest Expense

Noninterest expense for the year ended December 31, 2010 was $22.7 million compared to $20.9 million for the same period of 2009, an increase of $1.8 million. Salaries and employee benefits, the largest component of noninterest expense, increased $121,000, from $11.5 million for the period ending December 31, 2009 to $11.6 million for the same period in 2010. 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 $189,000. Professional fees and services increased $262,000 due mainly to increased loan collection costs. Data processing costs reflected a modest increase of $61,000, while software costs increased by $72,000. Growth in electronic banking operations, including preparation for new services, created increased expense of $83,000. Marketing and donations expense grew by $545,000 and included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development. Other noninterest expense increased $334,000 for the comparable twelve month period. The table on page 66 reflects the additional breakdown of other noninterest expense. FDIC assessment costs decreased $163,000 during the twelve month ending December 31, 2010. During 2009, the FDIC had implemented a special one-time assessment which amounted to $209,000 for the Company’s subsidiary banks that did not recur during 2010.

Income Tax Expense

The Company had an income tax expense of $151,000 for 2010 at an effective tax rate of 17.48% compared to income tax benefit of $163,000 in 2009. 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, 2009 and 2008

Earnings

Uwharrie Capital Corp reported net income of $690,000 for the twelve months ended December 31, 2009, as compared to $2.0 million for the twelve months ended December 31, 2008, a decrease of $1.3 million. Net income available to common shareholders was $48,000 or $0.01 per common share at December 31, 2009, compared to $2.0 million or $0.27 per common share

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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

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 62 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 63 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 $817,000 for the twelve months ended December 31, 2009 as compared with net loan charge-offs of $118,000 during the same period of 2008. Refer to the Asset Quality discussion beginning on page 56 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 decreased 12.1%, from $6.6 million in 2008 to $5.8 million in 2009, a decrease of $773,000. 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 in 2009. These increases were offset by a decrease in other service fees and commissions of $504,000. Income generated from brokerage commissions and asset management fees decreased $389,000 to $1.3 million, while other banking fees decreased $115,000 or 10.1% during 2009. The recent downturn in the

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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 $711,000 and a loss of $172,000 on Silverton Bank stock. As previously discussed, the Company recorded an additional other-than-temporary impairment of $1.8 million during 2009 compared to $158,000 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 $890,000, 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 $141,000. Professional fees and services increased $281,000. FDIC assessment costs also increased $830,000 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 $239,000 for the comparable twelve month period. The table on page 66 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax benefit of $163,000 for 2009 compared to income tax expense of $804,000 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.

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 continuously evaluates the adequacy of the allowance for loan loss. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function, through a review process, 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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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 inherent risk in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that 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 was $4.9 million for the year ended December 31, 2010 as compared to $1.7 million for the same period in 2009. At the end of 2010 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $43.3 million compared to $24.1 million at December 31, 2009, an increase of $19.2 million. The increase in the level of impaired loans resulted from ten customer relationships totaling $17.1 million. These relationships are deemed impaired from a cashflow standpoint; however, we believe they are more than adequately collateralized. At this time the collateral appears to be the primary source for the repayment. Total nonaccrual loans, which are a component of impaired loans, increased from $5.6 million at December 31, 2009 to $19.7 million at December 31, 2010. The Company had net loan charge-offs for 2010 of $1.1 million compared to net loan charge-offs of $817,000 for the same period in 2009.

The allowance expressed as a percentage of gross loans held for investment increased 85 basis points from 1.49% at December 31, 2009 to 2.34% at December 31, 2010. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans increased from 0.81% at December 31, 2009 to 1.29% at December 31, 2010, an increase of 48 basis points. Given the continued declines in the credit quality metrics relating to nonperforming loans since December 31, 2009, the increase in the reserve was warranted. During the year we upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

expected loss scenario by call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the new allowance model. The loans that are impaired and included in the specific reserve are excluded from these new calculations. The continued deteriorating credit metrics as evaluated in our updated allowance model resulted in $2.1 million in loan loss provisions during the third quarter of 2010. Approximately $300,000 of the $2.1 million was related to increases in impaired loans Nonperforming loans, which consist of nonaccrual loans and loan 90 days and still accruing, to total loans increased from 1.67% at December 31, 2009, to 5.19% at December 31, 2010. During the period the Company had a decrease in other real estate owned of $1.4 million. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

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

Nonperforming Assets

(dollars in thousands)


	At December 31,
	2010			2009			2008			2007			2006
Nonperforming Assets:
Nonaccrual loans past due 90 days or more	$	407		$	282		$	3		$	—		$	500
Nonaccrual loans		19,730			5,630			3,898			1,795			1,211
Other real estate owned		2,022			3,419			2,816			163			203

Total nonperforming assets	$	22,159		$	9,331		$	6,717		$	1,958		$	1,914


Allowance for loan losses	$	9,067		$	5,276		$	4,361		$	3,510		$	3,171
Nonperforming loans to total loans		5.19	%		1.67	%		1.14	%		0.56	%		0.59	%
Allowance for loan losses to total loans		2.34	%		1.49	%		1.28	%		1.09	%		1.10	%
Nonperforming assets to total assets		4.14	%		1.95	%		1.48	%		0.48	%		0.50	%
Allowance for loan losses to nonperforming loans		45.03	%		89.24	%		111.79	%		195.54	%		185.33	%

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Tier I leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2010, the Company’s 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. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends. There was not a dividend declared in 2010 or 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 65, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2010 included $14.3 million in federal funds lines of credit from correspondent banks and approximately $31.7 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, 2010, borrowings from federal funds lines and the issuance of commercial paper amounted to $8.6 million, while other short-term borrowings totaled $11.9 million. Long-term debt at that date consisted of advances of $24.0 million from the Federal Home Loan Bank, junior subordinated debt of $9.9 million, a mortgage payable of $66,000 and a note payable for the purchase of a building of $100,000.

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2010.


	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	$	20,482	$	20,482	$	—	$	—	$	—
Long-term debt		34,061		—		22,619		8,941		2,501
Operating leases		400		60		120		120		100


Total contractual cash obligations, excluding deposits		54,943		20,542		22,739		9,061		2,601

Deposits		434,033		381,776		36,836		15,421		—

Total contractual cash obligations, including deposits	$	488,976	$	402,318	$	59,575	$	24,482	$	2,601

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

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

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 2010 is reflected in Financial Table 3 on page 64. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

gap analysis. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rates environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary banks, using a no growth and most likely balance sheet growth, for a two year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one year horizon, indicates a negative impact of (10.44%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 8.56% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, all three of the subsidiary banks are asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. All three of the subsidiary banks have the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

The principal goals for asset liability management for the Company are to maintain adequate levels and sources of liquidity and to manage interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on both interest-sensitive assets and liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result from changes in interest rates. Managing interest rate risk is an important factor to the long term viability of the Company since the Net Interest Income (Margin) is such a large component of earnings. The Company’s Asset Liability Management Committee (ALCO) monitors market changes in interest rates and assists with the pricing of loans and deposit products while considering the funding source needs 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)


	2010							2009							2008
	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	$	78,479		2,508		3.20	%	$	63,934	$	3,128		4.89	%	$	36,573	$	2,021		5.53	%
Non-taxable securities (1)		8,301		319		6.25	%		14,115		622		7.17	%		14,738		678		7.49	%
Short-term investments		9,211		44		0.48	%		6,334		66		1.04	%		5,386		85		1.58	%
Taxable loans (2)		371,057		21,378		5.76	%		345,448		21,020		6.08	%		332,986		22,592		6.78	%
Non-taxable loans (1)		6,258		238		6.18	%		4,387		226		8.38	%		4,086		188		7.49	%

Total interest-earning assets		473,306		24,487		5.25	%		434,218		25,062		5.89	%		393,769		25,564		6.63	%


Non-earning assets
Cash and due from banks		6,449							7,057							9,964
Premises and equipment, net		14,246							12,616							9,735
Interest receivable and other		20,424							17,838							9,389

Total non-earning assets		41,119							37,511							29,088

Total assets	$	514,425						$	471,729						$	422,857


Interest-bearing liabilities
Savings deposits	$	35,535	$	327		0.92	%	$	30,912	$	255		0.82	%	$	26,246	$	301		1.15	%
Interest checking & MMDA		162,373		971		0.60	%		120,307		838		0.70	%		109,469		1,357		1.24	%
Time deposits		158,173		2,876		1.82	%		172,108		4,816		2.80	%		155,983		6,281		4.03	%

Total deposits		356,081		4,174		1.17	%		323,327		5,909		1.83	%		291,698		7,939		2.72	%

Short-term borrowed funds		26,352		693		2.63	%		24,092		316		1.31	%		19,453		529		2.72	%
Long-term debt		31,939		1,084		3.39	%		30,992		1,472		4.75	%		31,190		1,360		4.36	%

Total interest-bearing liabilities		414,372		5,951		1.44	%		378,411		7,697		2.03	%		342,341		9,828		2.87	%


Noninterest liabilities
Transaction deposits		50,223							46,630							45,685
Interest payable and other		4,405							3,506							2,586

Total liabilities		469,000							428,547							390,612


Shareholders’ equity		45,425							43,182							32,245

Total liabilities and shareholders equity	$	514,425						$	471,729						$	422,857


Interest rate spread						3.81	%						3.86	%						3.76	%


Net interest income and net interest margin			$	18,536		3.99	%			$	17,365		4.12	%			$	15,736		4.13	%

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)


	2010 Versus 2009									2009 Versus 2008
	Volume			Rate			Net Change			Volume			Rate			Net Change
Interest-earning assets

Taxable securities	$	588		$	(1,208	)	$	(620	)	$	1,425		$	(318	)	$	1,107
Non-taxable securities		(240	)		(63	)		(303	)		(28	)		(28	)		(56	)
Short-term investments		22			(44	)		(22	)		12			(31	)		(19	)
Taxable loans		1,517			(1,159	)		358			802			(2,374	)		(1,572	)
Non-taxable loans		84			(72	)		12			15			23			38

Total interest-earning assets		1,971			(2,546	)		(575	)		2,226			(2,728	)		(502	)


Interest-bearing liabilities

Savings deposits		40			32			72			46			(92	)		(46	)
Transaction and MMDA deposits		272			(139	)		133			105			(624	)		(519	)
Other time deposits		(322	)		(1,618	)		(1,940	)		550			(2,015	)		(1,465	)
Short-term borrowed funds		45			332			377			93			(306	)		(213	)
Long-term debt		39			(427	)		(388	)		(9	)		121			112

Total interest-bearing liabilities		74			(1,820	)		(1,746	)		785			(2,916	)		(2,131	)


Net interest income	$	1,897		$	(726	)	$	1,171		$	1,441		$	188		$	1,629

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	$	7,926		$	750		$	—			—		$	—		$	8,676
Investment securities		1,098			705			2,381			26,796			65,415			96,395
FHLB and other stock		—			—			—			—			4,531			4,531
Loans held for sale		6,286			—			—			—			—			6,286
Loans held for investment		121,269			27,533			53,558			136,782			48,627			387,769


Total interest-earning assets		136,579			28,988			55,939			163,578			118,573			503,657


Interest-bearing liabilities
Deposits		45,050			25,549			68,118			187,752			107,564			434,033
Short-term borrowed funds		16,482			2,000			2,000			—			—			20,482
Long-term debt		—			—			—			31,560			2,501			34,061


Total interest-bearing liabilities		61,532			27,549			70,118			219,312			110,065			488,576


Interest sensitivity GAP per period	$	75,047		$	1,439		$	(14,179	)	$	(55,734	)	$	8,508		$	15,081


Cumulative interest sensitivity GAP	$	75,047		$	76,486		$	62,307		$	6,573		$	15,081		$	15,081


Ratios
Cumulative gap as a percentage of total interest-earning assets		14.90	%		15.19	%		12.37	%		1.31	%		2.99	%		2.99	%

Cumulative interest-earning assets as a percentage of interest-bearing liabilities		221.96	%		185.86	%		139.14	%		101.74	%		103.09	%		103.09	%

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, 2010
	Amortized Cost		Estimated Fair Value		Book Yield(1)
Securities available for sale

U. S. Treasury
Due within one year		1,000		1,006		0.90	%
Due after one but within five years		2,018		2,066		1.70	%
Due after five but within ten years		48,604		48,076		2.28	%

		51,622		51,148		2.23	%

U.S. Government agencies
Due one within one year		504		519		3.96	%
Due after one but within five years		18,457		19,208		2.84	%
Due after five but within ten years		5,901		5,736		1.84	%

		24,862		25,463		2.62	%

Mortgage-backed securities
Due after five but within ten year		2,498		2,633		3.97	%
Due after ten years		6,157		6,267		4.22	%

		8,655		8,900		4.15	%

State and political
Due within one year		576		577		2.36	%
Due after one but within five years		3,286		3,437		4.21	%
Due after five but within ten year		4,860		4,859		3.03	%
Due after ten years		2,003		2,011		4.18	%

		10,725		10,884		3.57	%

Total Securities available for sale
Due within one year		2,080		2,102		2.05	%
Due after one but within five years		23,761		24,711		2.93	%
Due after five but within ten year		61,863		61,304		2.37	%
Due after ten years		8,160		8,278		4.21	%

	$	95,864	$	96,395		2.66	%

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,
	2010			2009			2008
Service charges on deposit accounts	$	2,219		$	2,360		$	2,238
Other banking fees		1,362			1,023			1,138
Asset management fees		1,357			1,054			1,396
Brokerage commissions		164			196			243
Other noninterest income		543			480			578


Core noninterest income		5,645			5,113			5,593

Income from mortgage loan sales		3,172			3,436			1,208
Security gains (losses)		1,484			(711	)		—
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	)
Losses from sale of OREO		(332	)		(36	)		(41	)
Other gains (losses) from sale of assets		(71	)		1			(5	)

Total noninterest income	$	9,898		$	5,824		$	6,597

Financial Table 6

Other Noninterest Expense

(dollars in thousands)


	Year Ended December 31,
	2010		2009		2008
Postage	$	221	$	200	$	200
Telephone and data lines		233		237		244
Loan collection cost		330		185		292
Shareholder relations expense		150		187		185
Dues and subscriptions		186		161		147
Other		1,628		1,444		1,320


Total other noninterest expense	$	2,748	$	2,414	$	2,388

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,
	2010						2009						2008
	Amount			% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	51,679			13.33	%	$	51,723			14.63	%	$	45,470			13.35	%
Real estate - construction		56,602			14.60	%		44,976			12.72	%		50,661			14.87	%
Real estate - residential		155,814			40.19	%		144,154			40.77	%		139,346			40.90	%
Real estate - commercial		105,123			27.12	%		95,938			27.13	%		89,561			26.29	%
Consumer		17,721			4.57	%		16,628			4.70	%		15,499			4.55	%
Other		739			0.19	%		172			0.05	%		121			0.04	%


Total loans		387,678			100.00	%		353,591			100.00	%		340,658			100.00	%


Less:
Allowance for loan losses		(9,067	)					(5,276	)					(4,361	)
Unearned net loan fees		91						138						172


Net loans	$	378,702					$	348,453					$	336,469


	At December 31,
	2007						2006
	Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	37,724			11.72	%	$	36,406			12.64	%
Real estate - construction		46,546			14.46	%		27,342			9.49	%
Real estate - residential		135,842			42.21	%		126,111			43.79	%
Real estate - commercial		86,593			26.90	%		84,744			29.43	%
Consumer		15,022			4.67	%		13,262			4.60	%
Other		143			0.04	%		133			0.05	%


Total loans		321,870			100.00	%		287,998			100.00	%


Less:
Allowance for loan losses		(3,510	)					(3,171	)
Unearned net loan fees		117						137


Net loans	$	318,477					$	284,964

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, 2010
	One Year or Less		One to Five Years		Over Five Years		Total
Commercial and agricultural	$	25,846	$	17,223	$	8,610	$	51,679
Real estate – construction		26,168		19,996		10,438		56,602


Total selected loans	$	52,014	$	37,219	$	19,048	$	108,281


Fixed rate loans	$	23,515	$	96,325	$	80,637	$	200,477


Sensitivity to rate changes:
Variable interest rates	$	193,578	$	—	$	—	$	193,578

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,
	2010			2009			2008			2007			2006
Allowance for loan losses at beginning of year	$	5,276		$	4,361		$	3,510		$	3,171		$	4,482
Provision for loan losses		4,919			1,732			969			15			298

Other		17
Loan charge-offs:
Commercial		59			39			122			—			1,533
Real estate		924			692			15			—			14
Consumer		206			140			151			224			140

Total charge-offs		1,189			871			288			224			1,687


Recoveries of loans previously charged off:
Commercial		3			19			120			440			34
Real estate		4			14			—			—			—
Consumer		37			21			50			108			44

Total recoveries		44			54			170			548			78

Net charge-offs (recoveries)		1,145			817			118			(324	)		1,609

Allowance for loan losses at end of year	$	9,067		$	5,276		$	4,361		$	3,510		$	3,171

Net (charge-offs) recoveries as a percent of average loans		0.31	%		0.24	%		0.04	%		(0.11	)%		0.55	%

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,
	2010					2009					2008
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	966		10.65	%	$	449		14.63	%	$	288		13.35	%
Real estate - construction		2,190		24.15	%		1,373		12.72	%		1,232		14.87	%
Real estate - residential		2,629		29.00	%		1,477		40.77	%		1,180		40.90	%
Real estate - commercial		2,240		24.70	%		1,541		27.13	%		1,385		26.29	%
Consumer loans		984		10.85	%		436		4.70	%		276		4.55	%
Other		58		0.64	%		—		0.05	%		—		0.04	%
Unallocated		—		—	%		—		—	%		—		—	%


Total loans	$	9,067		100.00	%	$	5,276		100.00	%	$	4,361		100.00	%


	At December 31,
	2007					2006
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	326		11.72	%	$	356		12.64	%
Real estate – construction		325		14.46	%		255		9.49	%
Real estate – residential		922		42.21	%		1,235		43.79	%
Real estate – commercial		1,715		26.90	%		1,123		29.43	%
Consumer		222		4.67	%		202		4.60	%
Other		—		0.04	%		—		0.05	%
Unallocated		—		—	%		—		—	%


Total loans	$	3,510		100.00	%	$	3,171		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	$	14,090	$	5,051	$	20,084	$	20,206	$	59,431

Other Time Deposits		17,677		11,785		33,135		32,051		94,648


	$	31,767	$	16,836	$	53,219	$	52,257	$	154,079

Financial Table 12

Performance Ratios


	At December 31,
	2010			2009			2008			2007			2006
Return on average assets		0.14	%		0.15	%		0.48	%		0.75	%		0.56	%
Return on average equity		1.57	%		1.60	%		6.29	%		9.73	%		7.32	%
Equity to average assets ratio		8.83	%		9.15	%		7.63	%		7.73	%		7.67	%

UWHARRIE CAPITAL CORP

Board of Directors


W. Stephen Aldridge, III	Charles D. Horne	Cynthia L. Mynatt
President	President	President
Stanly Funeral Home, Inc.	Hornwood, Inc.	Ben Mynatt Buick – GMC

Joe S. Brooks	W. Kenneth Huntley	Timothy J. Propst
Board Vice Chairman	President and Owner	Executive Vice President
Owner and Manager	Huntley Oil & Gas Co., Inc.	Propst Construction Co., Inc.
Brothers Precision Tool Co.

Ronald T. Burleson	Joseph R. Kluttz, Jr.	Susan J. Rourke
Partner	Secretary and Treasurer	President and Owner
Thurman Burleson and Sons Farm	Albemarle Insurance	U. S. Land Management Co.
	Agency, Inc.

Bill C. Burnside, DDS	Lee Roy Lookabill, Jr.	Donald P. Scarborough
Sole Proprietor	President	Board Chairman
Dental Practice	Anson Real Estate and	President and Broker-Owner
	Insurance Co., Inc.	Plank Road Realty, Inc.

Charles F. Geschickter, III	W. Chester Lowder	S. Todd Swaringen
President and	Director of Livestock Program	Partner
Chief Executive Officer	Public Policy Division	Beane Swaringen &
JTG Racing, Inc.;	NC Farm Bureau	Company, PLLC
ST Motorsports, Inc.	Federation, Inc.

Thomas M. Hearne, Jr.	Barry S. Moose	Edward B. Tyson
Retired - Geopavement Engineer	Division Engineer	Retired - Superintendent of
NC Department	NC Department	Kannapolis City Schools
of Transportation	of Transportation
Executive Officers
Roger L. Dick	Christy D. Stoner	Dana A. Maness
President and	President and	President
Chief Executive Officer	Chief Executive Officer	Anson Bank & Trust Co.
Uwharrie Capital Corp	The Strategic Alliance
	Corporation, BOS
Brendan P. Duffey	Agency, Inc.	W.D. “Bill” Lawhon, Jr.
Executive Vice President and	Chief Executive Officer	President and
Chief Operating Officer	Strategic Investment	Chief Executive Officer
Uwharrie Capital Corp	Advisors, Inc.	Bank of Stanly
	Executive Vice President
Robert O. Bratton	Marketing	Patricia K. Horton
Chief Financial Officer	Uwharrie Capital Corp	President and
Uwharrie Capital Corp		Chief Executive Officer
		Cabarrus Bank & Trust
Barbara S. Williams	Jeffrey M. Talley	Company
Executive Vice President and	President
Controller	Strategic Investment
Uwharrie Capital Corp	Advisors, Inc.

Attached files

UWHARRIE CAPITAL CORP Reports

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