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, 2006

OR

¨ 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 7,204,832 shares of common stock outstanding as of August 7, 2006.

Table of Contents

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Balance Sheets June 30, 2006 and December 31, 2005	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005	4
	Consolidated Statement of Changes in Shareholders’ Equity Six Months Ended June 30, 2006	5
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005	6
	Notes to Consolidated Financial Statements	7
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4 -	Controls and Procedures	19
Part II.	OTHER INFORMATION
Item 1 -	Legal Proceedings	19
Item 1A -	Risk Factors	19
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3 -	Defaults Upon Senior Securities	20
Item 4 -	Submission of Matters to a Vote of Security Holders	20
Item 5 -	Other Information	21
Item 6 -	Exhibits	22

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

	June 30, 2006			December 31, 2005*
	(Unaudited)
ASSETS
Cash and due from banks	$	13,921,919		$	11,438,743
Interest-earning deposits with banks		2,414,282			3,729,940
Federal funds sold		1,790,000			6,200,000
Securities available for sale, at fair value		32,865,301			35,015,878
Loans:
Loans held for sale		3,012,095			3,353,455
Loans held for investment		293,401,014			272,842,420
Less allowance for loan losses		(4,600,515	)		(4,482,304	)
Net loans		291,812,594			271,713,571
Premises and equipment, net		8,246,648			8,432,296
Interest receivable		1,603,785			1,525,366
Federal Home Loan Bank stock		1,890,200			2,072,200
Bank owned life insurance		5,029,981			4,948,772
Goodwill		987,436			987,436
Other assets		4,968,405			4,125,663
Total assets	$	365,530,551		$	350,189,865
LIABILITIES
Deposits:
Demand noninterest-bearing	$	47,145,692		$	47,279,515
Interest checking and money market accounts		87,522,170			83,679,745
Savings deposits		32,401,438			36,689,516
Time deposits, $100,000 and over		51,920,131			38,881,451
Other time deposits		73,539,648			67,445,605
Total deposits		292,529,079			273,975,832
Short-term borrowed funds		11,370,169			7,903,628
Long-term debt		31,699,767			39,103,025
Interest payable		416,925			368,850
Other liabilities		1,427,739			1,385,754
Total liabilities		337,443,679			322,737,089
Off balance sheet items, commitments and contingencies (Note 6)
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,204,832 and 7,138,686 shares, respectively		9,006,040			8,923,357
Additional paid-in capital		12,437,798			12,409,663
Unearned ESOP compensation		(886,631	)		(914,088	)
Undivided profits		7,572,764			6,705,568
Accumulated other comprehensive income(loss)		(43,099	)		328,276
Total shareholders’ equity		28,086,872			27,452,776
Total liabilities and shareholders’ equity	$	365,530,551		$	350,189,865

(*) Derived from audited consolidated financial statements

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
INTEREST INCOME
Loans, including fees	$	5,486,706		$	4,205,819		$	10,478,464		$	8,222,929
Investment securities
US Treasury		24,463			24,392			48,705			48,634
US Government agencies and corporations		214,590			125,977			396,573			252,409
State and political subdivisions		176,734			161,626			355,484			321,349
Other		15,087			32,160			70,978			67,317
Interest-earning deposits with banks and Federal funds sold		54,355			44,137			98,336			89,459
Total interest income		5,971,935			4,594,111			11,448,540			9,002,097
INTEREST EXPENSE
Time deposits, $100,000 and over		483,825			270,621			836,163			509,653
Other interest-bearing deposits		1,440,402			694,350			2,691,921			1,295,577
Short-term borrowed funds		198,981			47,570			299,023			91,107
Long-term debt		439,087			487,462			906,275			962,953
Total interest expense		2,562,295			1,500,003			4,733,382			2,859,290
Net interest income		3,409,640			3,094,108			6,715,158			6,142,807
Provision for loan losses		98,500			145,000			244,000			360,000
Net interest income after provision for loan losses		3,311,140			2,949,108			6,471,158			5,782,807
Non-interest income
Service charges on deposit accounts		499,062			392,870			968,811			754,386
Other service fees and commissions		613,761			426,431			1,133,469			852,554
Gain/ (loss) on sale of securities		—			(20,232	)		—			(16,272	)
Gain/ (loss) on sale fixed assets/other assets		(17,351	)		48,938			(17,351	)		49,101
Income from mortgage loan sales		102,076			130,590			287,502			308,439
Other income		79,684			69,241			165,925			147,090
Total non-interest income		1,277,232			1,047,838			2,538,356			2,095,298
Non-interest expense
Salaries and employee benefits		2,266,837			1,979,547			4,514,874			3,905,543
Net occupancy expense		181,991			151,582			369,698			305,277
Equipment expense		152,967			164,438			309,470			330,712
Data processing costs		206,147			206,357			406,067			411,544
Other noninterest expense		1,193,870			1,022,887			2,257,689			1,996,710
Total non-interest expense		4,001,812			3,524,811			7,857,798			6,949,786
Income before income taxes		586,560			472,135			1,151,716			928,319
Income taxes		144,956			113,270			284,520			229,620
Net income	$	441,604		$	358,865		$	867,196		$	698,699
Net income per common share
Basic	$	0.06		$	0.05		$	0.12		$	0.10
Diluted	$	0.06		$	0.05		$	0.12		$	0.10
Weighted average shares outstanding
Basic		7,041,067			7,057,093			7,010,038			7,067,103
Diluted		7,127,656			7,230,843			7,119,863			7,241,138

See accompanying notes

-4-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

	Common Stock					Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits		Accumulated Other Comprehensive Income			Total
	Shares		Amount
Balance, December 31, 2005	7,138,686		$	8,923,357		$	12,409,663		$	(914,088	)	$	6,705,568	$	328,276		$	27,452,776
Net income	—			—			—			—			867,196		—			867,196
Other comprehensive income	—			—			—			—			—		(371,375	)		(371,375	)
Release of ESOP shares	—			—			19,598			27,457			—		—			47,055
Common stock issued pursuant to:
Stock options exercised	90,010			112,513			91,642			—			—		—			204,155
Repurchase of common stock	(23,864	)		(29,830	)		(115,263	)		—			—		—			(145,093	)
Stock option compensation expense	—			—			32,158			—			—		—			32,158
Balance, June 30, 2006	7,204,832		$	9,006,040		$	12,437,798		$	(886,631	)	$	7,572,764	$	(43,099	)	$	28,086,872

See accompanying notes

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months ended June 30,
	2006			2005
Cash flows from operating activities
Net income	$	867,196		$	698,699
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		316,319			325,300
Net amortization of security premiums/discounts		(7,133	)		13,040
Provision for loan losses		244,000			360,000
Net realized loss on available for sale securities		—			16,272
Income from mortgage loan sales		(287,502	)		(308,439	)
Proceeds from sales of loans held for sale		24,144,533			22,281,258
Origination of loans held for sale		(24,198,391	)		(22,824,822	)
Loss on sale of premises, equipment and other assets		(2,071	)		(163	)
Increase in cash surrender value of life insurance		(81,209	)		(79,500	)
Loss on sales of other real estate		(15,280	)		(48,938	)
Release of ESOP shares		47,055			43,923
Stock option expense		32,158			—
Net change in interest receivable		(78,419	)		(125,997	)
Net change in other assets		(317,941	)		171,599
Net change in interest payable		48,075			60,491
Net change in other liabilities		41,985			210,499
Net cash provided by operating activities		753,375			793,222
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		2,939,256			1,370,181
Purchase of securities available for sale		(1,385,939	)		(1,473,563	)
Net (increase) decrease in loans		(20,263,836	)		176,621
Proceeds from sale of premises, equipment and other assets		—			655
Purchase of premises and equipment		(132,742	)		(239,159	)
Proceeds from sales of other real estate		171,812			133,938
Net cash used in investing activities		(18,671,449	)		(31,327	)
Cash flows from financing activities
Net increase (decrease) in deposit accounts		18,553,247			(1,977,864	)
Net increase (decrease) in short-term borrowed funds		3,466,541			6,319,048
Net increase (decrease) in long-term debt		(7,403,258	)		(7,403,258	)
Repurchases of common stock		(145,093	)		(517,849	)
Net proceeds from issuance of common stock		204,155			124,480
Net cash provided (used) by financing activities		14,675,592			(3,455,443	)
Decrease in cash and cash equivalents		(3,242,482	)		(2,693,548	)
Cash and cash equivalents, beginning of period		21,368,683			19,574,769
Cash and cash equivalents, end of period	$	18,126,201		$	16,881,221

-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”), 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 the fiscal year ending December 31, 2006. 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. Certain prior period amounts have been reclassified to conform to current period classifications. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

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 2005 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.

(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net Income	$	442		$	359		$	867		$	699
Other comprehensive income (loss)
Unrealized holding gains (losses) on Available for sale securities		(246	)		402			(604	)		(108	)
Related tax effect		95			(155	)		233			41
Reclassification of loss Recognized in net income		—			20			—			16
Related tax effect		—			(8	)		—			(6	)
Total other comprehensive income (loss)		(151	)		259			(371	)		(57	)
Comprehensive income	$	291		$	618		$	496		$	642

-7-

Note 3 – Per Share Data

On September 20, 2005, the Company’s Board of Directors declared a 3% stock dividend payable on November 14, 2005 to shareholders of record on October 20, 2005. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend. There were no anti-dilutive stock options outstanding during 2006 or 2005.

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 Company. The computation of basic and dilutive earnings per share is summarized below:

	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
Weighted average number of common shares used in computing basic net income per common share	7,041,067	7,057,093	7,010,038	7,067,103
Effect of diluted stock options	86,589	173,750	109,825	174,035
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share	7,127,656	7,230,843	7,119,863	7,241,138

Note 4 – Loans

Loans outstanding at period end: (in thousands)	June 30, 2006		December 31, 2005
Commercial	$	36,499	$	37,299
Real estate-construction		29,926		21,206
Real estate-residential		123,806		116,926
Real estate-commercial		90,996		83,861
Consumer loans		12,130		13,478
All other loans		44		72
Total	$	293,401	$	272,842

Analysis of the allowance for loan losses: (in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Balance at beginning of period	$	4,564		$	4,988		$	4,482		$	4,983
Provision charged to operations		98			145			244			360
Charge-offs		(110	)		(78	)		(184	)		(298	)
Recoveries		49			14			59			24
Net Charge-offs		(61	)		(64	)		(125	)		(274	)
Balance at end of period	$	4,601		$	5,069		$	4,601		$	5,069

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Note 5 – Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (revised 2004, “Share-Based Payment”, (“SFAS No. 123R”)) which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of 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). SFAS No. 123R 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. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows”, to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

The Company had one share-based compensation plan and an ESPP in effect. The compensation cost charged against income for those plans for the six months ended June 30, 2006 was $32 thousand.

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.

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 options granted during the six months ended June 30, 2006 or 2005.

The following is a summary of stock option activity for the six months ended June 30, 2006:

	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2005	663,256		$	4.58
Granted	—			—
Exercised	(90,010	)		2.27
Forfeited	(48,573	)		5.98
Outstanding at June 30, 2006	524,673			4.83	$	693
Options exercisable at June 30, 2006	444,804			4.70		645

-9-

A summary of the status of the Company’s non-vested stock options as of June 30, 2006, and changes during the quarter then ended is presented below:

	Shares		Weighted Average Grant Date Fair Value
Non-vested – December 31, 2005	153,505		$	1.50
Granted	—			—
Vested	(25,063	)		1.47
Forfeited	(48,573	)		1.59
Non-vested- June 30, 2006	79,869			1.49

The fair value of stock options vested over the six months ended June 30, 2006 and 2005 was $37 thousand and $11 thousand respectively.

As of June 30, 2006, there was $119 thousand 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.

The adoption of SFAS 123R and its fair value compensation cost recognition provisions are different from the non-recognition provisions under SFAS 123 and the intrinsic value method for compensation cost allowed under APB 25. The effect (increase/ (decrease)) of the adoption of SFAS 123R is as follows:

	Three Months ended June 30, 2006		Six Months ended June 30, 2006
Income before income tax expense	(15,280	)	(32,158	)
Net Income	(15,280	)	(32,158	)
Cash flow from operating activities	—		—
Cash flow provided by financing activities	—		—
Basic earnings per share	—		(.01	)
Diluted earnings per share	—		(.01	)

For the six months ended June 30, 2006, the intrinsic value of options exercised was $349 thousand and $35 thousand for the six months ended June 30, 2005. For the three months ended June 30, 2006, the intrinsic value of options exercised was $302 thousand and $1 thousand for the three months ended June 30, 2005.

-10-

The following illustrates the effect on net income available to common stockholders if the Company had applied the fair value recognition provisions of SFAS No. 123 to the results for the three and six months ended June 30, 2005 (in thousands, except per share data):

	Three Months ended June 30, 2005			Six Months ended June 30, 2005
Net income as reported	$	359		$	699
Add: Stock-based employee compensation expenses included in reported net income, net of related income tax effects		—			—
Less: Stock-based compensation determined under fair value based method of all awards, net of related income taxes		(22	)		(88	)
Net income, pro forma	$	337		$	611
Net income per share:
Basic net income per common share
As reported	$	.05		$	.10
Pro forma		.05			.09
Diluted net income per share
As reported		.05			.10
Pro forma		.05			.08

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, 2006, outstanding financial instruments whose contract amounts represent credit risk were approximately (in thousands):

Commitments to extend credit	$	65,607
Credit card commitments		7,236
Standby letters of credit		501
Total commitments	$	73,344

Note 7 – Recent Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” which is effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. The Company is currently evaluating the new statement to determine the potential impact, if any, this would have on our financial results.

-11-

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.

Comparison of Financial Condition at June 30, 2006 and December 31, 2005.

During the six months ended June 30, 2006, total assets increased $15.3 million or 4.4% from $350.2 million to $365.5 million. During the six months, net loans receivable increased $20.1 million or 7.4%, from $271.7 million at December 31, 2005 to $291.8 million at June 30, 2006. This increase, however, was offset by an overall decrease in liquid assets consisting of cash and due from banks, interest earning deposits with banks, federal funds sold and investment securities of $5.4 million. Interest-earning deposits with banks decline $1.3 million, while federal funds sold and investment securities decreased $4.4 million and $2.2 million respectively. These decreases were offset by an increase in cash and due from banks of $2.5 million.

As stated, net loans receivable increased $20.1 million to $291.8 million during the period ended June 30, 2006. The Company has experienced positive growth trends in its residential construction, commercial real estate and residential 1-4 family lending. These positive trends were impacted by decreases in the remaining areas of our loan portfolio. The allowance for loan losses was $4.6 million at June 30, 2006 which represents 1.57% of the loan portfolio.

Federal Home Loan Bank stock decreased $182 thousand or 8.8% during the first six months of 2006. FHLB stock ownership is a requirement for member banks that utilize FHLB for borrowing funds. The amount of stock owned by each member bank is based on the amount of borrowings outstanding.

Customer deposits, our primary funding source, experienced an $18.5 million or 6.8% increase, increasing from $274 million at December 31, 2005 to $292.5 million at June 30, 2006. The most significant factor attributing to the increase was the growth of $19.1 million in time deposits. Customers that have kept their deposit funds in a liquid position while interest rates have been down are now beginning to invest in longer term time deposits. This fact coupled with the Company beginning an aggressive marketing campaign, while offering attractive interest rates, are the primary reasons for the growth. Interest checking and money market accounts also experienced a positive growth trend for the period. This increase was offset by declines in savings deposits and non interest bearing demand accounts.

The Company utilizes both short-term and long-term borrowings as funding sources. During the period, total borrowings outstanding decreased $3.9 million. At June 30, 2006, $26.4 million of the total borrowings of $43.1 million were comprised of Federal Home Loan Bank advances.

At June 30, 2006, total shareholders’ equity was $28.1 million, an increase of $634 thousand from December 31, 2005. Net income for the period was $867 thousand and the Company received $204 thousand from the exercise of stock options. These increases were offset by a decrease in unrealized gains on our investment securities, net of tax of $371 thousand and by the Company’s repurchase of 23,864 shares of common stock at a cost of $145 thousand.

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At June 30, 2006, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended June 30, 2006 and 2005.

Net Income

Uwharrie Capital Corp reported net income of $442 thousand, or $.06 per basic share, for the three months ended June 30, 2006, as compared to $359 thousand, or $.05, for the three months ended June 30, 2005, an increase of $83 thousand or $.01 per share.

Net Interest Income

The Company’s primary source of income, net interest income, increased $315 thousand or 10.2% for the period ending June 30, 2006, as compared to the same period for 2005. Increased levels of interest earning assets, coupled with interest rate increases by the Federal Reserve Bank during the past year are the contributing factors for this increase. Refer to the six month discussion on page 17 for further information

Provision and Allowance for Loan Losses

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and by recoveries of amounts previously charged off, and reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. In evaluating the adequacy of the allowance, management considers the 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 the 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 helps 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

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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.

Loans classified as “substandard” are those loans with clear and defined weaknesses such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the timely payments on the loan. They are characterized by the distinct possibility that the Company may sustain some losses if the deficiencies are not corrected. A reserve of 15% is generally allocated to these loans. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. A reserve of 50% is generally allocated to loans classified as doubtful. Loans classified as “loss” are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above classification categories, the Company also categorizes loans based upon risk grade and loan type, assigning an allowance allocation based upon each category.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially 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 $99 thousand and $145 thousand for the quarters ended June 30, 2006 and 2005 respectively, resulting in a decrease of $46 thousand. Net loan charge-offs, were $61 thousand, or .02%, of average loans outstanding for the quarter ended June 30, 2006, compared to $64 thousand, or .02%, of average loans outstanding for the same period in 2005.

Our allowance for loan losses increased to $4.6 million at June 30, 2006 an increase of $118 thousand from December 2005. The allowance expressed as a percentage of total loans decreased from 1.62% at December 31, 2005 to 1.55% at June 30, 2006. During the six month period, total non-performing loans declined $362 thousand and loans 90 days past due and still accruing interest decreased $20 thousand. Restructured loans, excluding those included in nonperforming loans, amounted to $3.5 million at June 30, 2006, an increase of $160 thousand since December 31, 2005. The ratio of non-performing loans to total loans decreased from .68% at December 31, 2005 to .51 % at June 30, 2006. The six month period did see a decrease in net loan charge-offs of $149 thousand compared to the same six month period in 2005. Management believes the current level of allowance for loan losses to be adequate at this time. The following table sets forth information with respect to nonperforming assets for the dates indicated.

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Schedule of Nonperforming Assets (In thousands)	June 30, 2006			December 31, 2005
Nonperforming Assets:
Nonaccrual loans	$	1,513		$	1,875
Other real estate owned		245			169
Total nonperforming assets	$	1,758		$	2,044
Accruing loans past due 90 days or more	$	319		$	339
Allowance for loan losses		4,601			4,482
Allowance for loan losses to total loans		1.55	%		1.62	%
Allowance for loan losses to nonperforming loans		304.10	%		239.09	%
Nonperforming loans to total loans		.51	%		.68	%
Nonperforming assets to total assets		.48	%		.58	%

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 increased $229 thousand, from $1.0 million for the quarter ended June 30, 2005 to $1.3 million for the same period in 2006. Service charges on deposit accounts produced earnings of $499 thousand for the three months ended June 30, 2006, an increase of $106 thousand, or 27.0%. During the third quarter of 2005, the Company implemented a new non-sufficient funds program. This program along with the growth in deposit accounts generated an increase of $85 thousand in non-sufficient fees. Other service fees and commissions experienced a 43.9% increase for the comparable three month periods. Growth in ATM fees of $19 thousand and investment related fees of $112 thousand enhanced this increase.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2006 was $4.0 million compared to $3.5 million for the same period of 2005, an increase of $477 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $287 thousand, from $2.0 million for the quarter ending June 30, 2005 to $2.3 million for the same period in 2006. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases attributed to this increase. Other noninterest expense increased $171 thousand for the comparable three month periods. The table below reflects the composition of other noninterest expenses.

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Other noninterest expenses (in thousands)	Three months ended June 30,
	2006		2005
Professional fees and services	$	170	$	152
Marketing and donations		166		125
Office supplies, printing and postage		128		115
Telephone and data lines		52		48
Electronic banking expenses		134		122
Software amortization and maintenance		87		59
Loan collection expense		57		67
Other		400		335
Total	$	1,194	$	1,023

Income Tax Expense

Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and tax advantaged loans. Income tax expense calculated for the quarter ended June 30, 2006 totaled $145 thousand compared to $113 thousand in the quarter ended June 30, 2005. The effective tax rate increased from 24.0% for the period ended June 30, 2005 to 24.7% for the three months ended June 30, 2006 due to a relative decrease in nontaxable income compared to total taxable income.

Comparison of Results of Operations For the Six Months Ended June 30, 2006 and 2005.

Net Income

Uwharrie Capital Corp reported net income of $867 thousand, or $.12 per basic share, for the six months ended June 30, 2006, as compared to $699 thousand, or $.10, for the six months ended June 30, 2005, an increase of $168 thousand, or $.02 per share.

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 six months ended June 30, 2006 was $6.7 million as compared with $6.1 million during the six months ended June 30, 2005, resulting in an increase of $572 thousand, or 9.32%. This increase resulted from the increased volume of interest-earning assets coupled with a 100 basis point increase in the overall yield on interest-earning assets. The yield on interest earning assets for the current six months was 7.12%. The cost of interest-bearing liabilities increased 117 basis points to 3.42%. The net interest spread decreased 18 basis points to 3.69%. A large majority of our loan portfolio is comprised of adjustable rate loans. These loans reprice each time the Federal Reserve adjusts interest rates. Deposits on the other hand are repriced at maturity. While both our yield and cost experienced increases, the repricing of deposits negatively impacted our net interest spread. The net interest margin for the first six months of 2006 was 4.23%, as compared to 4.21% for the same period in 2005.

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The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2006 and 2005.

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

	Average Balance				Income/Expenses				Rate/Yield
(in thousands)	2006		2005		2006		2005		2006		2005
Interest-earning assets:
Loans (1)	$	286,044	$	261,574	$	10,377	$	8,127	7.32	%	6.27	%
Nontaxable loans (2)		4,279		3,972		101		96	7.35	%	7.54	%
Taxable securities		24,709		19,668		580		428	4.73	%	4.39	%
Nontaxable securities (2)		11,613		10,762		292		262	9.51	%	7.51	%
Other (3)		3,769		7,183		98		89	5.24	%	2.50	%
Total interest-earning assets		330,414		303,159		11,448		9,002	7.12	%	6.12	%
Interest-bearing liabilities:
Interest-bearing deposits		229,050		204,824		3,528		1,805	3.11	%	1.78	%
Short-term borrowings		13,167		9,152		299		91	4.58	%	2.01	%
Long-term borrowings		36,577		42,526		906		963	4.99	%	4.57	%
Total interest bearing liabilities		278,794		256,502		4,733		2,859	3.42	%	2.25	%
Net interest spread	$	51,620	$	46,657	$	6,715	$	6,143	3.69	%	3.87	%
Net interest margin (2) (% of earning assets)									4.23	%	4.21	%

(1) Average loan balances are stated net of unearned income and include nonaccrual loans. Interest recognized on nonaccrual loans is included in interest income.

(2) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 35% tax rate.

(3) Includes federal funds sold and interest bearing deposits with banks.

Noninterest Income

Total noninterest income increased $443 thousand, from $2.1 million for the six months ended June 30, 2005 to $2.5 million for the same period in 2006. Service charges on deposit accounts produced earnings of $969 thousand for the six months ended June 30, 2006, an increase of $214 thousand, or 28%. The growth in deposit accounts coupled with the previously mentioned new non-sufficient funds program generated an increase of $169 thousand in non-sufficient funds. Other service fees and commissions experienced a 33.0% increase for the comparable six month periods. Growth in ATM and MasterCard fees of $53 thousand and investment related fees of $152 thousand enhanced this increase.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2006 was $7.8 million compared to $6.9 million for the same period of 2005, an increase of $908 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $609 thousand. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases attributed to this increase. Other noninterest expense increased $261 thousand for the comparable six month periods. The table below reflects the composition of other noninterest expenses.

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Other noninterest expenses (in thousands)	Six months ended June 30,
	2006		2005
Professional fees and services	$	298	$	293
Marketing and donations		292		227
Office supplies, printing and postage		251		215
Telephone and data lines		108		101
Electronic banking expenses		282		231
Software amortization and maintenance		163		110
Loan collection expense		113		135
Other		751		685
Total	$	2,258	$	1,997

Income Tax Expense

Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and tax advantaged loans. Income tax expense calculated for the six months ended June 30, 2006 totaled $285 thousand compared to $230 thousand in the six months ended June 30, 2005. The effective tax rate was 24.7% for both periods

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 $20.2 million at June 30, 2006, with available credit of $19.9 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $35.4 million, access to borrowings from the Federal Reserve Bank discount window, and the sale of securities under agreements to repurchase. In addition, the Company issues commercial paper and has secured long-term debt from other sources. Total debt from these sources aggregated $43.1 million at June 30, 2006, compared to $47.0 million at December 31, 2005.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The FDIC and the Federal Reserve, the primary federal regulators of the Company and its subsidiary banks, have 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 I leverage ratio of 4 percent. Banks, which meet or exceed a Tier I ratio of 6 percent, a total capital ratio of 10 percent and a Tier I 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.

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Both the Company and its subsidiary banks have maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies.

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.

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. The Company’s market risk profile has not changed significantly since December 31, 2005.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company’s management completed an evaluation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no material changes in the Company’s internal controls or in other factors that could materially affect these controls during the period covered by this report.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor its subsidiaries, nor any of their properties are subject to any legal proceedings other than ordinary routine litigation incidental to their business.

Item 1A. Risk Factors

There has been no change in the risk factors included in the Company’s most recent form 10-K.

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

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2006.

	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)	(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
April 1, 2006 Through April 30, 2006	23,864	$	6.08	—	$	—
May 1, 2006 Through May 31, 2006	—	$	—	—	$	—
June 1, 2006 Through June 30, 2006	—	$	—	—	$	—
Total	23,864	$	6.08	—		—

(1) 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. This is not a publicly announced plan. 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.

(2) On April 18, 2006 the Executive Committee of Uwharrie Capital Corp mandated by resolution that the Company could repurchase up to $145,093 of its common stock during the second quarter of 2006. This resolution is under a Stock Repurchase Plan that is contingent upon maintaining a well capitalized regulatory capital ratio. The purchase price under the plan is set on a quarterly basis, based on an independent valuation of the Company’s stock price, and is approved by the Board. The Board individually approves stock repurchases that exceed $50,000 in any one transaction or when repurchases would exceed the quarterly allocation.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of shareholders was held on Tuesday, May 2, 2006 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 22, 2006, (1) to elect six (6) directors of the Company to three (3) year terms, and to elect one (1) director of the Company to two (2) year term; and (2) to approve the 2006 Stock Option Plan; (3) to approve the 2006 Employees Stock Option Plan; and (4) to ratify the appointment of the Company’s independent public accountants for 2006, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.

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Proposal (1) To elect six (6) directors to a three (3) year term. Votes for each nominee were as follows:

Nominee	For	Withheld
Joseph R. Klutz, Jr.	4,582,678	125,962
James E. Nance	4,575,453	133,187
Emmett S. Patterson	4,681,775	26,865
Michael E. Snyder, Sr.	4,648,185	60,455
Douglas L. Stafford	4,684,465	24,175
Emily M. Thomas	4,684,465	24,175

Proposal (1) To elect one (1) director to a two (2) year term. Votes for each nominee were as follows:

Nominee	For	Withheld
Charles F. Geschickter, III	4,684,465	24,175

The following eleven directors continued in office: Robert P. Barbee, Joe S. Brooks, Thomas M. Hearne, Jr., B. Franklin Lee, W. Chester Lowder, John P. Murray, M.D., Timothy J. Propst, Susan J. Rourke, Donald P. Scarborough, John W. Shealy, Jr., and Hugh E. Wallace.

Proposal (2) To approve the 2006 Incentive Stock Option Plan.

For	3,660,580
Against	366,268
Abstain	110,582

Proposal (3) To approve the 2006 Employee Stock Purchase Plan.

For	3,737,460
Against	244,805
Abstain	155,165

Proposal (4) To ratify the appointment of Dixon Hughes PLLC as the Company’s independent public accountants for 2006.

For	4,675,234
Against	7,103
Abstain	26,303

Item 5. Other Information

None

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Item 6. Exhibits

(a) Exhibits

31.1 Certification of Chief Executive Officer pursuant to Rule 13{a} – 14(a)

31.2 Certification of Principal Financial Officer pursuant to Rule 13{a} – 14(a)

32 Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

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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 11, 2006	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer
Date: August 11, 2006	By:	/s/ Barbara S. Williams
		Barbara S. Williams
		Principal Financial Officer

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