UWHR 10-Q Quarterly Report June 30, 2010

UWHR 10-Q Quarter ended June 30, 2010

UWHARRIE CAPITAL CORP

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10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)


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

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

Registrant’s Telephone number, including area code: (704) 983-6181

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

Indicate the number of shares outstanding of each of the classes of common stock issuer’s as of the latest practicable date: 7,593,929 shares of common stock outstanding as of August 6, 2010.

Table of Contents


		Page No.
Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2010 and December 31, 2009	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009	4

	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2010	5

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2010 and 2009	6

	Notes to Consolidated Financial Statements	7

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4T -	Controls and Procedures	27

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	28

Item 1A -	Risk Factors	28

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3 -	Defaults Upon Senior Securities	29

Item 4 -	Reserved	29

Item 5 -	Other Information	29

Item 6 -	Exhibits	30

	Exhibit Index	32

-2-

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements


	June 30, 2010 (Unaudited)			December 31, 2009*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	7,500		$	7,521
Interest-earning deposits with banks		3,777			3,338
Securities available for sale, at fair value		94,994			76,317
Loans held for sale		1,991			2,628
Loans:
Loans held for investment		372,821			353,729
Less allowance for loan losses		(5,635	)		(5,276	)

Net loans held for investment		367,186			348,453

Premises and equipment, net		14,127			13,646
Interest receivable		2,416			2,077
Federal Home Loan Bank stock		3,330			3,201
Bank owned life insurance		5,835			5,714
Goodwill		987			987
Other real estate owned		3,281			3,419
Prepaid assets		2,679			2,617
Other assets		6,933			7,928

Total assets	$	515,036		$	477,846


LIABILITIES
Deposits:
Demand noninterest-bearing	$	50,651		$	44,924
Interest checking and money market accounts		167,874			137,708
Savings deposits		36,586			32,120
Time deposits, $100,000 and over		64,283			64,736
Other time deposits		90,494			97,286

Total deposits		409,888			376,774

Short-term borrowed funds		22,515			26,940
Long-term debt		33,589			26,643
Interest payable		389			396
Other liabilities		2,424			3,069

Total liabilities		468,805			433,822

Off balance sheet items, commitments and contingencies (Note 6)

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		(350	)		(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		14,032			14,030
Unearned ESOP compensation		(629	)		(667	)
Undivided profits		10,603			10,056
Accumulated other comprehensive income		2,583			1,013

Total shareholders’ equity		46,231			44,024

Total liabilities and shareholders’ equity	$	515,036		$	477,846

(*)	Derived from audited consolidated financial statements

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	5,492		$	5,218		$	10,794		$	10,593
Investment securities
US Treasury		131			—			159			—
US Government agencies and corporations		546			769			1,170			1,550
State and political subdivisions		79			176			171			365
Interest-earning deposits with banks and federal funds sold		10			19			18			43

Total interest income		6,258			6,182			12,312			12,551


Interest Expense
Interest checking and money market accounts		241			199			478			397
Savings deposits		82			69			152			123
Time deposits, $100,000 and over		295			534			604			1,092
Other time deposits		430			755			898			1,553
Short-term borrowed funds		157			71			298			186
Long-term debt		281			368			548			732

Total interest expense		1,486			1,996			2,978			4,083

Net interest income		4,772			4,186			9,334			8,468
Provision for loan losses		830			196			1,043			568

Net interest income after provision for loan losses		3,942			3,990			8,291			7,900


Noninterest Income
Service charges on deposit accounts		563			567			1,129			1,135
Other service fees and commissions		768			575			1,429			1,032
Gain (loss) on sale of securities		62			20			(36	)		(20	)
Loss on nonmarketable securities		—			—			—			(172	)
Total other-than-temporary impairment loss		—			(1,855	)		—			(1,855	)
Portion of loss recognized in other comprehensive income		—			1,651			—			1,651

Net impairment recognized in earnings		—			(204	)		—			(204	)
Loss fixed assets/other assets		(60	)		(20	)		(60	)		(20	)
Income from mortgage loan sales		390			1,131			736			2,567
Other income		100			104			228			184

Total noninterest income		1,823			2,173			3,426			4,502


Noninterest Expense
Salaries and employee benefits		2,886			2,886			5,714			5,759
Net occupancy expense		272			242			538			487
Equipment expense		176			180			358			361
Data processing costs		209			198			411			389
Professional fees and services		283			237			631			415
Marketing and donations		196			169			382			333
Electronic banking expense		193			178			377			355
Software amortization and maintenance		123			107			230			223
FDIC insurance		179			281			352			348
Other noninterest expense		698			803			1,394			1,490

Total noninterest expense		5,215			5,281			10,387			10,160

Income before income taxes		550			882			1,330			2,242
Income taxes		219			259			460			714

Net income	$	331		$	623		$	870		$	1,528

Net Income	$	331			623			870			1,528
Dividends – preferred stock		(161	)		(160	)		(323	)		(322	)

Net income available to common shareholders	$	170		$	463		$	547		$	1,206

Net income per common share
Basic	$	0.02		$	0.06		$	0.07		$	0.16

Diluted	$	0.02		$	0.06		$	0.07		$	0.16

Weighted average shares outstanding
Basic		7,488,781			7,472,003			7,486,695			7,469,905
Diluted		7,488,781			7,472,003			7,486,695			7,469,905

See accompanying note

-4-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


	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	—		—		—		—			—		—		—			870			—		870
Other comprehensive income	—		—		—		—			—		—		—			—			1,570		1,570
Release of ESOP shares	—		—		—		—			—		—		38			—			—		38
Stock compensation expense	—		—		—		—			—		2		—			—			—		2
Record preferred stock dividend and discount accretion	—		—		—		50			—		—		—			(323	)		—		(273	)


Balance, June 30, 2010	7,593,929	$	10,000	$	500	$	(350	)	$	9,492	$	14,032	$	(629	)	$	10,603		$	2,583	$	46,231

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
	2010			2009
	(dollars in thousands)
Cash flows from operating activities
Net income	$	870		$	1,528
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation		384			387
Net amortization of security premiums/discounts		170			43
Impairment of securities available for sale		—			204
Net amortization of mortgage servicing rights		325			656
Impairment of foreclosed real estate		—			34
Provision for loan losses		1,043			568
Stock compensation		2			9
Net realized loss on sales / calls available for sales securities		36			20
Income from mortgage loan sales		(736	)		(2,567	)
Proceeds from sales of loans held for sale		28,609			106,574
Origination of loans held for sale		(27,545	)		(105,337	)
(Gain)loss on sale of premises, equipment and other assets		9			(1	)
Loss on nonmarketable securities		—			172
Increase in cash surrender value of life insurance		(121	)		(97	)
Loss on sales of foreclosed real estate		51			21
Release of ESOP shares		38			35
Net change in interest receivable		(339	)		40
Net change in other assets		(1,328	)		(1,738	)
Net change in interest payable		(7	)		(15	)
Net change in other liabilities		(645	)		696


Net cash provided by operating activities		816			1,232


Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		19,709			13,202
Purchase of securities available for sale		(34,516	)		(18,175	)
Net increase in loans		(20,489	)		(4,532	)
Proceeds from sale of premises, equipment and other assets		—			1
Purchase of premises and equipment		(874	)		(2,122	)
Proceeds from sales of foreclosed real estate		799			708
Investment in other assets		(260	)		(602	)
Net increase in Federal Home Loan Bank stock		(129	)		(863	)

Net cash used by investing activities		(35,760	)		(12,383	)


Cash flows from financing activities
Net increase in deposit accounts		33,114			18,157
Net decrease in short-term borrowed funds		(4,425	)		(7,607	)
Net increase (decrease) in long-term debt		6,946			(1,854	)
Dividends on preferred stock		(273	)		(272	)

Net cash provided by financing activities		35,362			8,424


Increase (decrease) in cash and cash equivalents		418			(2,727	)
Cash and cash equivalents, beginning of period		10,859			13,284


Cash and cash equivalents, end of period	$	11,277		$	10,557

See accompanying notes

-6-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2009 Annual Report on Form 10-K. This Quarterly report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(in thousands)

Net Income	$	331		$	623		$	870		$	1,528

Other comprehensive loss
Unrealized gain (losses) on available for sale securities		2,201			(360	)		2,358			886
Related tax effect		(758	)		138			(810	)		(333	)
Reclassification of loss (gains) recognized in net income		(62	)		(20	)		36			20
Related tax effect		24			(8	)		(14	)		(8	)
Reclassification of losses for which credit-related portion was recognized in net income		—			204			—			204
Related tax effect		—			(71	)		—			(78	)


Total other comprehensive gain (loss)		1,405			(117	)		1,570			691

Comprehensive income	$	1,736		$	506		$	2,440		$	2,219

-7-

Note 3 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the three and six periods ended June 30, 2010 and 2009, the Company had 213,190 and 459,856 stock options outstanding, respectfully. They did not have a dilutive effect on per share results because the exercise prices exceeded the average share values for each period.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Weighted average number of common shares outstanding	7,593,929		7,593,929		7,593,929		7,593,929

Effect of ESOP shares	(105,148	)	(121,926	)	(107,234	)	(124,024	)


Adjusted weighted average number of common shares used in computing basic net income per common share	7,488,781		7,472,003		7,486,695		7,469,905

Effect of dilutive stock options	—		—		—		—


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share	7,488,781		7,472,003		7,486,695		7,469,905

Note 4 – Investment Securities

Amortized cost and fair value of securities available for sale are summarized below:


June 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	24,289	$	873	$	—	$	25,162
U.S. Government agencies		30,284		1,394		—		31,678
Mortgage-backed securities and CMO’s		29,213		1,415		7		30,621
State and political subdivisions		7,188		345		—		7,533

Total securities available for sale	$	90,974	$	4,027	$	7	$	94,994

-8-


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 June 30, 2010 and December 31, 2009 the Company owned Federal Reserve stock reported at cost of $779,000 and included in other assets. Also at June 30, 2010 and December 31, 2009, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.3 and $3.2 million, respectfully. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2010.

Results from sales of securities available for sale for the three and six month periods ended June 30, 2010 and June 30, 2009 are as follows:


	Three Months Ended June 30,
	2010			2009
	(dollars in thousands)
Gross proceeds from sales	$	9,461		$	1,020


Realized gains from sales	$	215		$	20
Realized losses from sales		(153	)		—

Net realized gains	$	62		$	20


	Six Months Ended June 30,
	2010			2009
	(dollars in thousands)
Gross proceeds from sales	$	12,431		$	2,701


Realized gains from sales	$	224		$	73
Realized losses from sales		(260	)		(93	)

Net realized losses	$	(36	)	$	(20	)

At June 30, 2010 and December 31, 2009 securities available for sale with a carrying amount of $39.1 million and $11.4 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 June 30, 2010 and December 31, 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, and a volatile market and are in no way a reflection of the quality of the investments. At June 30, 2010 the unrealized losses related to one mortgage backed security. At December 31, 2009 the unrealized losses related to three U.S. Treasury notes, three U.S. Government Agencies, and five mortgage backed securities and CMOs.

-9-


	Less than 12 Months				12 Months or More				Total
June 30, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities available for sale temporary impairment
U.S. Gov’t agencies	$	3,052	$	7	$	—	$	—	$	3,052	$	7


	$	3,052	$	7	$	—	$	—	$	3,052	$	7


	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

	$	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 reviews interest rates, issuer ratings and any underlying collateral to identify and evaluate each investment security to determine whether OTTI has occurred. The Company’s OTTI problems have all centered around its private label collateralized mortgage obligations portfolio. The entire portfolio was sold during the first quarter if 2010 realizing a loss of $107,000. At this time the Company does not have any other-than-temporary impairment and also has the ability and the intent to hold the securities within its investment portfolio.

Based on these evaluations, the Company did have an other-than-temporary impairment on four private label collateralized mortgage obligations (“CMOs”) at June 30, 2009. An other-than-temporary charge of $204,000 due to the credit-related factors was recognized in earnings during the quarter ending June 30, 2009 and $1.7 million was determined to relate to other non-credit-related factors in the market place. The difference between total unrealized losses and estimated credit losses on these securities was charged against equity, net of deferred taxes, as a component of Other Comprehensive Income.

The following table, as of June 30, 2009, shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for a portion of an other-than-temporary impairment was recognized in other comprehensive income. There were no losses for the period ended June 30, 2010


	June 30, 2009		June 30, 2010
	(in thousands)
Balance of credit losses on debt securities at the beginning of the period	$	—	$	—
Increase related to credit loss for which an other-than-temporary impairment was recognized		204		107
Realized loss from sales		—		(107	)

Balance of credit losses on debt securities at the end of the period	$	204	$	—

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The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2010 and December 31, 2009 by remaining contractual maturity are as follows:


	June 30, 2010
	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury
Due after one but within five years		3,021		3,075
Due after five but within ten years		21,268		22,087

		24,289		25,162


U.S. Government agencies
Due after one but within five years		22,403		23,230
Due after five but within ten years		7,881		8,448

		30,284		31,678

Mortgage-backed securities
Due after five but within ten year		6,350		6,771
Due after ten years		22,863		23,850

		29,213		30,621

State and political
Due within one year		579		585
Due after one but within five years		3,295		3,480
Due after five but within ten year		1,311		1,402
Due after ten years		2,003		2,066

		7,188		7,533

Total Securities available for sale
Due within one year		579		585
Due after one but within five years		28,719		29,785
Due after five but within ten year		36,810		38,708
Due after ten years		24,866		25,916

	$	90,974	$	94,994


	December 31, 2009
	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury
Due after one but within five years		3,024		3,019


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

		20,736		20,971

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

		34,186		35,242

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


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

		9,276		9,585


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

	$	74,690	$	76,317

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Note 5 – Loans


	June 30, 2010		December 31, 2009
	(in thousands)

Loans outstanding at period end:
Commercial	$	51,650	$	51,723
Real estate-construction		51,549		44,976
Real estate-residential		152,557		144,292
Real estate-commercial		100,337		95,938
Consumer loans		16,572		16,628
All other loans		156		172

Total	$	372,821	$	353,729


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
				(in thousands)
Analysis of the allowance for loan losses
Balance at beginning of period	$	5,401		$	4,573		$	5,276		$	4,361

Provision charged to operations		830			196			1,043			568

Charge-offs		(609	)		(46	)		(701	)		(241	)
Recoveries		13			9			17			44

Net (charge-offs)		(596	)		(37	)		(684	)		(197	)

Balance at end of period	$	5,635		$	4,732		$	5,635		$	4,732

Note 6 – Commitments and Contingencies

The subsidiary banks are party 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 banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At June 30, 2010, outstanding financial instruments whose contract amounts represent credit risk were approximately:

(in thousands)


Commitments to extend credit	$	93,349
Credit card commitments		9,581
Standby letters of credit		1,167

Total commitments	$	104,097

Note 7 – Fair Value Disclosures

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

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practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

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

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

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2010 and December 31, 2009:


	June 30, 2010
			(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	25,162	$	25,162	$	—	$	—
US Government agencies		31,678		31,678		—		—
Mortgage-backed securities and CMO’s		30,621		—		30,621		—
State and political subdivisions		7,533		—		7,533		—


Total assets at fair value	$	94,994	$	56,840	$	38,154	$	—


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 Government agencies		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	$	—	$	—	$	—	$	—

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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 transfers 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 in accordance with ASC 310, Receivables, Loan and Debt Securities. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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 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.

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

The Company 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.

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

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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 June 30, 2010 and December 31, 2009:


	June 30, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	14,184	$	—	$	—	$	14,184
Other real estate owned		1,395		—		1,202		193


Total assets at fair value	$	15,579	$	—	$	1,202	$	14,377

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


	December 31, 2009
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	13,519	$	—	$	—	$	13,519
Other real estate owned		1,724		—		1,724		—


Total assets at fair value	$	15,243	$	—	$	1,724	$	13,519

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

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Note 8 – 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 June 30, 2010 and December 31, 2009, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2010 and December 31, 2009:


	June 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	11,277	$	11,300	$	10,859	$	10,896
Securities available for sale		94,994		94,994		76,317		76,317
Loans held for investment, net		367,186		380,256		348,453		363,619
Loans held for sale		1,991		1,995		2,628		2,634
FHLB and FRB Stock		4,109		4,109		3,980		3,980
Bank-owned life insurance		5,835		5,835		5,714		5,714
Mortgage servicing rights		1,874		2,196		1,890		2,193
Accrued interest receivables		2,416		2,416		2,077		2,077

Financial Liabilities
Deposits	$	409,888	$	411,221	$	376,774	$	400,997
Short-term borrowings		22,515		22,515		26,940		26,940
Long-term debt		33,589		37,342		26,643		28,173
Accrued interest payable		389		389		396		396

The carrying amount of cash and cash equivalents, which, includes $1.5 million 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 and 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 effect the valuation.

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•

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 analyses 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 analyses using offered market rates.

At June 30, 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 6.

Note 9 – Recent Accounting Pronouncements

In June 2009, the FASB issued ASU 2009-16, an update to ASC 860-10, “Transfers and Servicing,” and ASU 2009-17, an update to ASC 810-10, “Consolidation.” These updates are effective for the first interim reporting period of 2010. The update to ASC 860-10 amends the guidance to eliminate the concept of a QSPE and changes some of the requirements for derecognizing financial assets. The amendments to ASC 810-10: (a) eliminate the exemption for existing QSPEs from U.S. GAAP, (b) shift the determination of which enterprise should consolidate a VIE to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant to the VIE will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE.

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. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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

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revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

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

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors 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. Any use of “we” or “our” in the following discussion refers to the Company.

Comparison of Financial Condition at June 30, 2010 and December 31, 2009.

During the six months ended June 30, 2010, the Company’s total assets increased $37.2 million, from $477.8 million to $515.0 million. During the same period, loans held for investment also increased $19.1 million, while securities available for sale increased $18.7 million.

Cash and cash equivalents increased $418,000 during the six months ended June 30, 2010. Cash and due from banks decreased $21,000, while interest-earning deposits with banks increased $439,000.

Investment securities increased from $76.3 million to $95.0 million for the six months ended June 30, 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 first six months of 2010, the Company also had additional sales of several small pools of mortgage backed securities and calls on state and political subdivision securities totaling $5.0 million and generating net gains of $71,000. On June 30, 2010, the Company had net unrealized gains of $4.0 million. During the six month period, the Company purchased $34.5 million in new securities leveraging the proceeds from the aforementioned sales and calls and the influx of cash from the increase in deposits during the period.

Loans held for investment increased from $353.7 million to $372.8 million. The Company experienced positive growth trends in all areas of its real estate loan portfolio. Real estate one to four dwelling experienced the largest growth increasing 5.8% or $8.3 million. A portion of this increase is related to funding on existing commitments related to construction loans. Loans held for sale decreased 24.2% or $637,000 during the period. The allowance for loan losses was $5.6 million at June 30, 2010, which represents 1.51% of the loan portfolio. Refer to the Asset Quality discussion on page 25 for further information.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Premises and equipment, interest receivable, bank owned life insurance and prepaid assets increased $481,000, $339,000, $121,000 and $62,000, respectively. Other real estate owned declined $138,000. Federal Home Loan Bank stock increased $129,000 because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings.

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Customer deposits, our primary funding source, experienced a $33.1 million increase during the six months ended June 30, 2010, increasing from $376.8 million to $409.9 million. Demand noninterest bearing checking increased $5.7 million, while interest checking and money market accounts increased $30.2 million for the period. This increase is attributed to approximately $15.0 million in new public funds from one relationship and also from a shift from time deposits to money market accounts. Savings deposits grew $4.5 million. Time deposits over $100,000 experienced a decline of $453,000, while other time deposits declined $6.8 million during the first six months of 2010.

Total borrowings increased $2.5 million for the period which consist of both short-term and long-term borrowed funds primarily from the Federal Home Loan Bank. At June 30, 2010, $40.0 million of the total borrowings of $56.1 million were comprised of Federal Home Loan Bank advances.

Other liabilities decreased from $3.1 million at December 31, 2009 to $2.4 million at June 30, 2010, a decrease of $645,000.

At June 30, 2010, total shareholders’ equity was $46.2 million, an increase of $2.2 million from December 31, 2009. Net income for the period was $870,000. Unrealized gains on investment securities, net of tax improved $1.6 million. These increases were offset as the Company also recorded $273,000 in dividends on the series A and B preferred stock for the six months period. At June 30, 2010, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended June 30, 2010 and 2009.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $331,000 for the three months ended June 30, 2010, as compared to $623,000 for the three months ended June 30, 2009, a decrease of $292,000. Net income available to common shareholders was $170,000 or $0.02 per common share at June 30, 2010, compared to $463,000 or $0.06 per common share at June 30, 2009. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 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 for the three months ended June 30, 2010 was $4.8 million as compared with $4.2 million during the three months ending June 30, 2009, resulting in an increase of $586,000, or 14.0%. During the quarter ending June 30, 2010 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $309,000. The average yield on our interest–earning assets decreased 40 basis points to 5.47%, while the

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average rate we paid for our interest-bearing liabilities decreased 67 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in an increase of 27 basis points in our interest rate spread, from 3.74% in 2009 to 4.01% in 2010. Our net interest margin was 4.19% and 4.02% for the comparable three month periods in 2010 and 2009 respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended June 30, 2010 and 2009:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,

(in thousands)


	Average Balance				Income/Expenses				Rate/Yield
	2010		2009		2010		2009		2010		2009
Interest-earning assets:
Taxable securities	$	79,760	$	62,238	$	677	$	772	3.40	%	4.98	%
Nontaxable securities (1)		8,092		15,582		79		173	6.46	%	7.26	%
Short-term investments		7,254		8,124		10		19	0.55	%	0.94	%
Taxable loans		363,983		340,424		5,431		5,173	5.98	%	6.10	%
Non-taxable loans (1)		6,431		5,071		61		45	6.18	%	5.74	%

Total interest-earning assets		465,520		431,439		6,258		6,182	5.47	%	5.87	%

Interest-bearing liabilities:
Interest-bearing deposits		351,312		323,611		1,048		1,557	1.20	%	1.93	%
Short-term borrowed funds		22,963		21,262		157		71	2.74	%	1.34	%
Long-term debt		34,892		30,494		281		368	3.23	%	4.84	%

Total interest bearing liabilities		409,167		375,367		1,486		1,996	1.46	%	2.13	%


Net interest spread	$	56,353	$	56,072	$	4,772	$	4,186	4.01	%	3.74	%

Net interest margin (1)
(% of earning assets)									4.19	%	4.02	%

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

Provision and Allowance for Loan Losses

The provision for loan losses was $830,000 for the three months ending June 30, 2010 compared to $196,000 for the same period in 2009. There were net loan charge-offs of $596,000 for the three months ended June 30, 2010 as compared with net loan charge-offs of $37,000 during the same period of 2009. Refer to the Asset Quality discussion on page 24 for further information.

Noninterest Income

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assets due to the refinanced mortgage loans. Income generated from brokerage commissions and asset management fees increased $85,000. The Company realized income on the sale of investments in the amount of $62,000 in the second quarter of 2010, as compared to $20,000 for the same period in 2009.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2010 was $5.2 million compared to $5.3 million for the same period of 2009, a decrease of $66,000. Salaries and employee benefits, the largest component of noninterest expense, was $2.9 million for both for the quarters ending June 30, 2010 and 2009. Net occupancy expense and equipment expense had a combined increase of $26,000. Professional fees and services increased $46,000, primarily related to an increase in legal fees, attributed to loan foreclosures. FDIC assessment costs decreased $102,000 due to a special assessment charged by FDIC to all FDIC-insured financial institutions during the second quarter of 2009. Other noninterest expense decreased $105,000 for the comparable three month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense


	Three Months Ended June 30,
	2010		2009
	(in thousands)

Office supplies and printing	$	89	$	83
Postage		49		53
Telephone and data lines		51		56
Loan collection expense		61		105
Foreclosed loan expense		77		50
Shareholder relations expense		43		56
Dues and subscriptions		41		42
Other		287		358

Total	$	698	$	803

Income Tax Expense

The Company had income tax expense of $219,000 for the three months ended June 30, 2010 resulting in an effective tax rate of 39.8% compared to income tax expense of $259,000 and an effective rate of 29.4% in the 2009 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The Company had approximately $6.0 million in state municipal securities that had call features that were called during the second half of 2009. The increase in the effective tax rate resulted primarily from the decrease in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2009 quarter.

Comparison of Results of Operations For the Six Months Ended June 30, 2010 and 2009.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $870,000 for the six months ended June 30, 2010, as compared to $1.5 million for the six months ended June 30, 2009, a decrease of $658,000. Net income available to common shareholders was $547,000 or $0.07 per common share at June 30, 2010, compared at $1.2 million or $0.16 per common share at June 30, 2009. Net income available to common shareholders is net income less any dividends on preferred

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stock related to the $10.0 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 for the six months ended June 30, 2010 was $9.3 million as compared with $8.5 million during the six months ended June 30, 2009, resulting in an increase of $866,000, or 10.2%. During the quarter ending June 30, 2010 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $420,000. The average yield on our interest–earning assets decreased 41 basis points to 5.58%, while the average rate we paid for our interest-bearing liabilities decreased 68 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in an increase of 27 basis points in our interest rate spread, from 3.80% in 2009 to 4.07% in 2010. Our net interest margin was 4.25% and 4.09% for the comparable six month periods in 2010 and 2009 respectively. A portion of the Company’s loan portfolio has interest rate floors in place on the loans. This feature has attributed to the improved interest margin, however, this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2010 and 2009:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

(in thousands)


	Average Balance				Income/Expenses				Rate/Yield
	2010		2009		2010		2009		2010		2009
Interest-earning assets:
Taxable securities	$	72,842	$	60,475	$	1,330	$	1,556	3.68	%	5.19	%
Nontaxable securities (1)		8,650		16,103		170		359	6.46	%	7.32	%
Short-term investments		5,062		7,224		18		43	0.72	%	1.20	%
Taxable loans		358,379		343,380		10,672		10,499	6.01	%	6.17	%
Non-taxable loans (1)		6,487		4,793		122		94	6.18	%	6.40	%

Total interest-earning assets		451,420		431,975		12,312		12,551	5.58	%	5.99	%

Interest-bearing liabilities:
Interest-bearing deposits		340,293		315,987		2,132		3,165	1.26	%	2.02	%
Short-term borrowed funds		25,346		29,015		298		186	2.37	%	1.29	%
Long-term debt		31,038		30,707		548		732	3.56	%	4.81	%

Total interest bearing liabilities		396,677		375,709		2,978		4,083	1.51	%	2.19	%


Net interest spread	$	54,743	$	56,266	$	9,334	$	8,468	4.07	%	3.80	%


Net interest margin (1)
(% of earning assets)									4.25	%	4.09	%

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

Provision and Allowance for Loan Losses

The provision for loan losses was $1.0 million for the six months ending June 30, 2010 compared to $568,000 for the same period in 2009. There were net loan charge-offs of $684,000 for the six months ended June 30, 2010 as compared with net loan charge-offs of $197,000 during the same period of 2009. Refer to the Asset Quality discussion on page 24 for further information.

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Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income decreased $1.1 million for the six month period ending June 30, 2010 as compared to the same period in 2009. Income from mortgage loan sales decreased $1.8 million from $2.6 million for the six months ended June 30, 2009 to $736,000 for the same period in 2010. The decline in interest rates late in 2008 and during first quarter of 2009 lead to a wave of mortgage refinancing, as customers were able to refinance again at a lower rate. The volume of refinanced loans was much lower in the first six months of 2010. Service charges on deposit accounts produced earnings of $1.1 million for the six months ended June 30, 2010. Other service fees and commissions experienced a 38.5% increase for the comparable six month period. This is due in part to a reduction in the write-down of servicing assets due to the refinanced mortgage loans. Income generated from brokerage commissions and asset management fees increased $175,000. The Company realized losses on the sale of investments in the amount of $36,000 in the first six months of 2010, as compared to $20,000 for the same period in 2009. The Company had an investment in Silverton Bank stock that was a nonmarketable security which was written off as of March 31, 2009. The Company also recognized other-than-temporary impairment of $204,000 during the second quarter of 2009.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2010 was $10.4 million compared to $10.2 million for the same period of 2009, an increase of $227,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $45,000 to $5.7 million for the period ending June 30, 2010. Net occupancy expense and equipment expense had a combined increase of $48,000. Professional fees and services increased $216,000, primarily related to an increase in legal fees, attributed to loan collections. Other noninterest expense decreased $96,000 for the comparable six month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense


	Six Months Ended June 30,
	2010		2009
	(in thousands)

Office supplies and printing	$	177	$	160
Postage		101		102
Telephone and data lines		113		111
Loan collection expense		96		190
Foreclosed loan expense		131		68
Shareholder relations expense		93		100
Dues and subscriptions		90		85
Other		593		674

Total	$	1,394	$	1,490

Income Tax Expense

The Company had income tax expense of $460,000 for the six months ended June 30, 2010 resulting in an effective tax rate of 34.59% compared to income tax expense of $714,000 and

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an effective rate of 31.85% in the 2009 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The Company had approximately $6.0 million in state municipal securities that were called during the second half of 2009. The increase in the effective tax rate resulted primarily from the decrease in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2009 quarter.

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 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

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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 $1.0 million for the six months ended June 30, 2010 as compared to $568,000 for the same period in 2009. During the first six months 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 $40.6 million compared to $24.1 million at December 31, 2009, an increase of $16.5 million. The increase in the level of impaired loans resulted from nine customer relationships totaling $16.8 million that are included in impaired loans. 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 $8.9 million at June 30, 2010. The Company had net loan charge-offs for the first six months of 2010 of $684,000 compared to net loan charge-offs of $197,000 for the same period in 2009.

The allowance expressed as a percentage of gross loans held for investment increased 2 basis points from 1.49% at December 31, 2009 to 1.51% at June 30, 2010. FAS 5 allowance as a percentage of non-impaired loans decreased from 0.71% at December 31, 2009 to 0.66% at June 30, 2010, a decrease of five basis points. One of the factors attributing to this decrease was a drop in the unemployment rates that is one of the components in the FAS 5 calculation in the model. Another factor related to this decrease was the increase in nonaccruals loans. Once a relationship is nonaccrual, the relationship is pulled out of the FAS 5 calculation and evaluated under FAS 114 for impairment. Not all relationships evaluated under FAS 114 have impairment and this can result in a decrease in the overall allowance for loan loss. Nonperforming loans, which consist solely of nonaccrual loans, to total loans increased from 1.59% at December 31, 2009, to 2.41% at June 30, 2010. During the period the Company had a decrease in other real estate owned of $138,000. Even in these difficult economic times, management believes the current level of the allowance for loan losses to be adequate at this time.

The following nonperforming loan table shows the comparison for the six months ended June 30, 2010 to December 31, 2009:

Nonperforming Assets

(dollars in thousands)


	June 30, 2010			December 31, 2009
Nonperforming assets:
Nonaccrual loans	$	8,973		$	5,630
Other real estate owned		3,281			3,419

Total nonperforming assets	$	12,254		$	9,049

Accruing loans past due 90 days or more	$	312		$	17
Allowance for loans losses		5,635			5,276
Nonperforming loans to total loans		2.41	%		1.59	%

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Allowance for loan losses to total loans	1.51	%	1.49	%
Nonperforming assets to total loans and other real estate	3.29	%	2.56	%
Nonperforming assets to total assets	2.38	%	1.89	%
Allowance for loan losses to nonperforming loans	62.80	%	93.71	%

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $18.8 million at June 30, 2010, with available credit of $18.8 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $35.3 million, access to borrowings from the Federal Reserve Bank discount window, with available credit of $16.1 million and the issuance of commercial paper. Total debt from these sources aggregated $56.1 million at June 30, 2010, compared to $53.6 million at December 31, 2009. The Company also has access to out of the market brokered deposits as long as they maintain a “well-capitalized position. At this time the Company does not have any brokered deposits.

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

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier 1 leverage ratio of 4 percent. Banks, which meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risked-based capital ratio of 10 percent and a leverage ratio of 5 percent are considered “well capitalized” by regulatory standards. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. At June 30, 2010, the total risk based for the Company and each subsidiary was as follows; the Company 13.94%, Bank of Stanly 12.96%, Anson Bank and Trust 14.02% and Cabarrus Bank and Trust 13.02%. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. The Company completed a private placement of subordinated debt during 2008 that qualifies as regulatory capital. This subordinated debt has a seven year maturity. The first two years the entire amount is included in regulatory capital and then is reduced by 20 percent a year until its maturity. At June 30, 2010, the Company had $7.4 million in outstanding subordinated debt and $10.0 million in preferred stock issued and outstanding to the United States Department of the Treasury.

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Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations. However, on July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act, was signed into legislation. The Act substantially rewrites the rules governing financial service providers and products, and implementation of the Act will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Key provisions of the Act include, among other things, (i) a new risk-based approach to financial services regulation giving federal bank regulatory agencies new authority to monitor the systemic safety of the financial system, take proactive steps to reduce or eliminate risks, impose strict controls on large bank holding companies and significant non-bank financial companies and take direct control of troubled financial companies; (ii) new regulation of systemically risky institutions by putting into place several new entities and a statutory liquidation process; (iii) increased bank supervision through establishment of the equivalent of a prompt corrective action program for large bank holding companies, requiring capital requirements for holding companies that are at least as strict as the capital requirements for depository institutions and direction to federal bank regulators to develop specific capital requirements for holding companies and depository institutions that address activities that pose risk to the financial system; (iv) establishment of a new independent federal regulatory body for consumer protection known as the Bureau of Consumer Financial Protection that will assume responsibility for most consumer protection laws; and, (v) placement of certain restrictions on investment and other activities by depository institutions, holding companies and affiliates including significant increases in the regulation of mortgage lending and servicing by banks and non-banks.

The Company is unsure and cannot know with certainty what the impact of the Act on the Company’s and its bank subsidiaries’ business, financial condition and results of operations will be and expect that some provisions of the Act may have adverse effects, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the Act, a potential increase in competition for deposits resulting from the rise in cost of funding using non-deposit liabilities which will now be subject to Federal Deposit Insurance Corporation assessments and the potential loss of interchange fee income from debit and credit card transactions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2009.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the second quarter of 2010. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Trades of the Company’s stock occur in the Over-the-Counter marketplace from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows. This plan was initially adopted in 1995 and is approved annually by resolution of the Board of Directors or the Executive Committee of the Board.

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.

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Item 3. Defaults Upon Senior Securities

None

Item 4. Reserved

Item 5. Other Information

None

-29-

Item 6. Exhibits


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation *

3.2		Registrant’s By-laws *****

4		Form of stock certificate *

10.1		Incentive Stock Option Plan, as amended *

10.2		Employee Stock Ownership Plan and Trust **

10.3		2006 Incentive Stock Option Plan ***

10.4		2006 Employee Stock Purchase Plan ***

10.5		Amendment to the Employee Stock Ownership Plan and Trust ****

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

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

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

*		Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).

**		Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.

***		Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.

****		Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.

*****		Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.

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Signatures

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


		UWHARRIE CAPITAL CORP
		(Registrant)

Date: August 12, 2010	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date: August 12, 2010		By:	/s/ Robert O. Bratton
		Robert O. Bratton
		Principal Financial Officer

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation *

3.2		Registrant’s By-laws *

4		Form of stock certificate *

10.1		Incentive Stock Option Plan, as amended *

10.2		Employee Stock Ownership Plan and Trust *

10.3		2006 Incentive Stock Option Plan *

10.4		2006 Employee Stock Purchase Plan *

10.5		Amendment to the Employee Stock Ownership Plan and Trust *

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

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

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

*		Incorporated by reference

**		Filed here within this report

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Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company