Exhibit 13

UWHARRIE CAPITAL CORP

2007 ANNUAL REPORT

24

Uwharrie Capital Corp

2007

ANNUAL REPORT TO SHAREHOLDERS

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

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

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

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

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

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

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

Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance^®) is a registered broker-dealer with the National Association of Securities Dealers, Inc. (“NASD”). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for a partnership with UVEST Financial Services, Inc., securities and insurance products are offered including fixed annuities, long-term care, and life products. Group insurance products are offered through an arrangement with Benchmark Life Strategies as well as Medicare supplement products.

The Strategic Alliance Corporation. Member NASD/SIPC.

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

Bank of Stanly, Member FDIC, Equal Housing Lender.

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

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

(Dollars in thousands except per share amounts)	2007			2006			Percent Increase (Decrease)
For the year:
Net income	$	2,959		$	2,071		42.88	%
Basic net income per common share (1)	$	0.40		$	0.28		42.86	%
Diluted net income per common share	$	0.40		$	0.27		48.15	%
Weighted average common shares outstanding (diluted)		7,482,361			7,574,856		(1.22	)%
At year-end:
Total assets	$	411,944		$	383,261		7.48	%
Total earning assets		380,549			350,823		8.47	%
Loans held for investment		321,987			288,135		11.75	%
Total interest-bearing liabilities		331,679			303,780		9.18	%
Shareholders’ equity		31,574			29,633		6.55	%
Book value per share (1)	$	4.26		$	3.87		10.08	%
Averages for the year:
Total assets	$	393,188		$	368,781		6.62	%
Total earning assets		365,579			341,995		6.90	%
Loans held for investment		308,149			293,394		5.03	%
Total interest-bearing liabilities		313,570			291,041		7.74	%
Shareholders’ equity		30,402			28,299		7.43	%
Financial Ratios (in percentage):
Return on average assets		0.75	%		0.56	%
Return on average shareholders’ equity		9.73	%		7.32	%
Average equity to average assets		7.73	%		7.67	%
Net interest margin (fully tax equivalent basis)		4.22	%		4.10	%
Allowance as % of loans at year-end		1.09	%		1.10	%
Allowance as % of nonperforming loans		195.57	%		261.78	%
Nonperforming loans to total loans		0.56	%		0.42	%
Nonperforming assets to total assets		0.48	%		0.37	%
Net loan charge-offs (recoveries) to average loans		(0.11	)%		0.55	%

(1) Net income per share, book value per share, and shares outstanding at year-end have been adjusted to reflect the 3% stock dividends in 2007 and in 2006.

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

It is the philosophy of Uwharrie Capital Corp to promote a strong, base of local shareholders. While bid and asked prices for the Company’s common stock are quoted on the Over the Counter Bulletin Board under the symbol UWHR, trading is sporadic with the most trades taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock. The Company has an independent valuation of its common stock performed on a quarterly basis and makes this valuation available to interested shareholders in order to promote fairness and market efficiency in privately negotiated transactions.

The Board of Directors has adopted a dividend policy on an annual basis. For 2007, Uwharrie Capital Corp declared a 3% stock dividend. The Board of Directors will determine on an annual basis, consistent with the capital needs of the Company an appropriate dividend. In addition, Uwharrie Capital Corp has adopted a stock repurchase program whereby the Company may make open market purchase of shares of its stock. The combination of private trades as well as the holding company purchases provides liquidity for the investors of Uwharrie Capital Corp.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

The following graph compares (i) the yearly change in the cumulative total shareholder return on the Company’s common stock with (ii) the cumulative return of The Carson Medlin Company Independent Bank Index, and (iii) the Nasdaq Composite. The graph assumes that the value of an investment in the Company’s common stock and in each index was $100 on December 31, 2002, and that all dividends were reinvested. The performance shown in the graph represents past performance and should not be considered the indication of future performance.

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina

March 14, 2008

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and 2006

	2007			2006
	(dollars in thousands)
ASSETS
Cash and due from banks	$	13,765		$	15,088
Interest-earning deposits with banks		2,432			2,147
Federal funds sold		—			17,525
Securities available for sale, at fair value		51,005			37,150
Loans held for sale		2,916			3,814
Loans:
Loans held for investment		321,987			288,135
Less allowance for loan losses		(3,510	)		(3,171	)
Net loans held for investment		318,477			284,964
Premises and equipment, net		8,751			8,618
Interest receivable		2,055			1,775
Federal Home Loan Bank stock		2,137			1,980
Bank owned life insurance		5,318			5,133
Goodwill		987			987
Other assets		4,101			4,080
Total assets	$	411,944		$	383,261
LIABILITIES
Deposits:
Demand noninterest-bearing	$	46,597		$	48,149
Interest checking and money market accounts		102,411			101,470
Savings deposits		26,200			27,833
Time deposits, $100,000 and over		54,729			48,450
Other time deposits		94,720			83,698
Total deposits		324,657			309,600
Short-term borrowed funds		31,928			13,040
Long-term debt		21,691			29,289
Interest payable		596			503
Other liabilities		1,498			1,196
Total liabilities		380,370			353,628
Off balance sheet items, commitments and contingencies (Note 12)
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,414,707 and 7,423,550 shares, respectively		9,268			9,279
Additional paid-in capital		13,453			13,541
Unearned ESOP compensation		(800	)		(859	)
Undivided profits		9,266			7,502
Accumulated other comprehensive income		387			170
Total shareholders’ equity		31,574			29,633
Total liabilities and shareholders’ equity	$	411,944		$	383,261

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2007, 2006 and 2005

	2007			2006		2005
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	23,916		$	21,959	$	17,446
Investment securities:
US Treasury		98			98		98
US Government agencies and corporations		1,401			832		537
State and political subdivisions		633			679		653
Other		128			174		125
Interest-earning deposits with banks and federal funds sold		733			611		302
Total interest income		26,909			24,353		19,161
Interest Expense
Interest checking and money market accounts		2,550			2,342		1,002
Savings deposits		526			734		580
Time deposits $100,000 and over		2,316			2,100		1,168
Other time deposits		4,138			3,091		1,723
Short-term borrowed funds		1,128			758		354
Long-term debt		1,218			1,677		1,803
Total interest expense		11,876			10,702		6,630
Net interest income		15,033			13,651		12,531
Provision for loan losses		15			298		755
Net interest income after provision for loan losses		15,018			13,353		11,776
Noninterest Income
Service charges on deposit accounts		2,188			2,000		1,707
Other service fees and commissions		3,097			2,329		1,728
Gain (loss) on sale of securities		(76	)		60		(16	)
Income from mortgage loan sales		957			764		554
Other income		424			316		378
Total noninterest income		6,590			5,469		4,351
Noninterest Expense
Salaries and employee benefits		10,156			9,130		8,002
Net occupancy expense		871			711		643
Equipment expense		598			618		639
Data processing costs		742			939		843
Other noninterest expense		4,995			4,520		3,960
Total noninterest expense		17,362			15,918		14,087
Income before income taxes		4,246			2,904		2,040
Income taxes		1,287			833		523
Net income	$	2,959		$	2,071	$	1,517
Net income per common share
Basic	$	0.40		$	0.28	$	0.20
Diluted	$	0.40		$	0.27	$	0.20
Weighted average common shares outstanding
Basic		7,382,033			7,462,115		7,459,530
Diluted		7,482,361			7,574,856		7,641,336

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
	(in thousands)
Net Income	$	2,959		$	2,071		$	1,517
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		275			(197	)		(761	)
Related tax effect		(105	)		76			293
Reclassification of losses (gains) recognized in net income		76			(60	)		16
Related tax effect		(29	)		23			(6	)
Total other comprehensive income (loss)		217			(158	)		(458	)
Comprehensive income	$	3,176		$	1,913		$	1,059

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2007, 2006 and 2005

	Common Stock					Additional Paid-in			Unearned ESOP			Undivided			Accumulated Other Comprehensive
	Shares		Amount			Capital			Compensation			Profits			Income			Total
	(in thousands, except share data)
Balance, December 31, 2004	7,057,755		$	8,822		$	12,043		$	(965	)	$	6,469		$	786		$	27,155
Net income	—			—			—			—			1,517			—			1,517
Other comprehensive loss	—			—			—			—			—			(458	)		(458	)
Release of ESOP shares	—			—			33			51			—			—			84
Common stock issued pursuant to:
3% stock dividend	206,730			258			1,013			—			(1,271	)		—			—
Stock options exercised	71,227			89			258			—			—			—			347
Tax benefit of stock options exercised	—			—			31			—			—			—			31
Repurchase of common stock	(197,026	)		(246	)		(968	)		—			—			—			(1,214	)
Cash paid—fractional shares	—			—			—			—			(9	)		—			(9	)
Balance, December 31, 2005	7,138,686			8,923			12,410			(914	)		6,706			328			27,453
Net income	—			—			—			—			2,071			—			2,071
Other comprehensive loss	—			—			—			—			—			(158	)		(158	)
Release of ESOP shares	—			—			37			55			—			—			92
Common stock issued pursuant to:
3% stock dividend	214,634			269			997			—			(1,266	)		—			—
Stock options exercised	94,094			117			107			—			—			—			224
Tax benefit of stock options exercised	—			—			48			—			—			—			48
Repurchase of common stock	(23,864	)		(30	)		(115	)		—			—			—			(145	)
Cash paid—fractional shares	—			—			—			—			(9	)		—			(9	)
Stock compensation expense	—			—			57			—			—			—			57
Balance, December 31, 2006	7,423,550			9,279			13,541			(859	)		7,502			170			29,633
Net income	—			—			—			—			2,959			—			2,959
Other comprehensive income	—			—			—			—			—			217			217
Release of ESOP shares	—			—			31			59			—			—			90
Common stock issued pursuant to:
3% stock dividend	216,062			270			916			—			(1,186	)		—			—
Stock options exercised	12,764			16			20			—			—			—			36
Tax benefit of stock options exercised	—			—			3			—			—			—			3
Repurchase of common stock	(237,669	)		(297	)		(1,107	)		—			—			—			(1,404	)
Cash paid—fractional shares	—			—			—			—			(9	)		—			(9	)
Stock compensation expense	—			—			49			—			—			—			49
Balance, December 31, 2007	7,414,707		$	9,268		$	13,453		$	(800	)	$	9,266		$	387		$	31,574

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Cash flows from operating activities
Net income	$	2,959		$	2,071		$	1,517
Adjustments to reconcile net income to net cash Provided by operating activities:
Depreciation		625			625			646
Net amortization of security premiums/discounts		(220	)		(41	)		37
Net amortization of mortgage servicing rights		407			382			390
Provision for loan losses		15			298			755
Deferred income taxes		205			439			52
Stock compensation		49			57			—
Net realized (gain) loss on available for sale securities		76			(60	)		16
Income from mortgage loan sales		(957	)		(764	)		(554	)
Proceeds from sales of loans held for sale		45,603			39,038			29,162
Origination of loans held for sale		(43,748	)		(38,734	)		(29,058	)
(Gain) loss on sale of premises, equipment and other assets		(26	)		9			(76	)
Increase in cash surrender value of life insurance		(185	)		(184	)		(155	)
(Gain) loss on sales of foreclosed real estate		2			24			(12	)
Release of ESOP Shares		90			92			84
Net change in interest receivable		(280	)		(250	)		(252	)
Net change in other assets		(866	)		(243	)		(13	)
Net change in interest payable		93			134			67
Net change in other liabilities		302			(190	)		316
Net cash provided by operating activities		4,144			2,703			2,922
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		10,382			9,190			1,487
Purchase of securities available for sale		(23,744	)		(11,480	)		(8,777	)
Net increase in loans		(33,588	)		(17,165	)		(14,332	)
Proceeds from sale of premises, equipment and other assets		87			—			230
Purchase of premises and equipment		(758	)		(813	)		(776	)
Proceeds from sales of foreclosed real estate		98			205			1,392
Net change in Federal Home Loan Bank stock		(157	)		(313	)		245
Net cash used by investing activities		(47,680	)		(20,376	)		(20,531	)
Cash flows from financing activities
Net increase in deposit accounts		15,057			35,624			27,037
Net increase (decrease) in short-term borrowed funds		18,888			5,136			(6,789	)
Net decrease in long-term debt		(7,598	)		(9,814	)		—
Repurchases of common stock		(1,404	)		(145	)		(1,214	)
Net proceeds from issuance of common stock		36			224			347
Tax benefit of stock options exercised		3			48			31
Cash paid for fractional shares		(9	)		(9	)		(9	)
Net cash provided by financing activities		24,973			31,064			19,403
Decrease (increase) in cash and cash equivalents		(18,563	)		13,391			1,794
Cash and cash equivalents, beginning of period		34,760			21,369			19,575
Cash and cash equivalents, end of period	$	16,197		$	34,760		$	21,369
Supplemental disclosures of cash flow information
Interest paid	$	11,783		$	10,568		$	6,563
Income taxes paid		1,311			687			241
Supplemental schedule of non-cash investing and financing activities
Increase (decrease) in fair value of securities available for sale, net of tax		217			(158	)		(456	)
Loans transferred to foreclosed real estate		60			262			1,064

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies

Nature of Business

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

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

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

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

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

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

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

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

Principles of Consolidation

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

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

Investment Securities Held To Maturity

Investment securities classified as held to maturity are debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Declines in the fair value of individual held to maturity securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. The Company had no securities held to maturity at December 31, 2007 and 2006.

Investment Securities Available for Sale

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

Loans Held for Sale

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

Loans

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

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

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

Allowance for Loan Losses

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

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

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

Servicing Rights

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

Transfers of Financial Assets

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

Foreclosed Real Estate

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

Premises and Equipment

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

Federal Home Loan Bank Stock

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Goodwill

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

Stock-Based Compensation

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.

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire, if not exercised, within two years of the grant date. Both of these plans expired in 2006. At December 31, 2007, the SOP had 504,207 options still outstanding and the SPP had no options outstanding.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire, if not exercised, within two years of the grant date. At December 31, 2007 there were no options outstanding under the SOP II or the SPP II. The compensation cost charged against income for the Company’s options, plans for the twelve months ended December 31, 2007, and 2006 was $49 thousand and $57 thousand, respectively.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the twelve months ended December 31, 2007. There were 15,450 shares granted during 2006 under the SOP II. The fair value at the grant date was $1.55 using the following assumptions; a risk-free interest rate of 4.5%, a dividend yield of 0%, an expected life equal to 70% of the term of the option, and volatility of 14%. These shares were forfeited in 2007. All options granted in 2005 were forfeited in 2006.

The following is a summary of stock option activity for the twelve months ended December 31, 2007:

	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2006	535,546		$	4.59
Granted	—			—
Exercised	(13,144	)		2.74
Forfeited	(18,195	)		5.46
Outstanding at December 31, 2007	504,207			4.61	$	576
Options exercisable at December 31, 2007	473,088			4.55		568

A summary of the status of the Company’s non-vested stock options as of December 31, 2007, and changes during the year then ended is presented below:

	Shares		Weighted Average Grant Date Fair Value
Non-vested December 31, 2006	81,276		$	1.38
Granted	—			—
Vested	(34,707	)		1.23
Forfeited	(15,450	)		1.62
Non-vested December 31, 2007	31,119			1.44

The grant date fair value of stock options vested over the twelve months ended December 31, 2007, 2006 and 2005 was $42 thousand, $64 thousand and $101 thousand, respectively.

As of December 31, 2007, there was $31 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 1.47 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.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

For the twelve months ended December 31, 2007, 2006 and 2005 the intrinsic value of options exercised was $38 thousand, $332 thousand, and $114 thousand, respectively.

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 twelve months ended December 31, 2005. (in thousands, except per share data):

	2005
Net income as reported	$	1,517
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		(136	)
Net income, pro forma	$	1,381
Net income per share:
Basic net income per common share
As reported	$	.20
Pro forma		.19
Diluted net income per share
As reported		.20
Pro forma		.18

Income Taxes

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

Fair Value of Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying market value or liquidation value of the Company.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

Carrying amounts approximate fair values for cash and due from banks; interest-bearing deposits with banks; federal funds sold; interest receivable and payable; variable rate loans that reprice frequently where no significant change in credit risk has occurred; bank owned life insurance; Federal Home Loan Bank stock; variable rate money market, demand, interest checking and savings accounts; variable rate time deposits; federal funds purchased and securities sold under repurchase agreements and short-term borrowed funds.

Quoted market prices, where available, or if not available, quoted market prices of comparable instruments are used for investment securities.

Discounted cash flows using interest rates currently being offered on instruments with similar terms and with similar credit quality are used for long-term debt; all loans (except variable rate loans described above) and fixed rate time deposits.

Comprehensive Income

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

Earnings per Common Share

The Company issued 3% stock dividends in 2007, 2006 and 2005. All references in these consolidated financial statements to earnings per common share and weighted average common and common equivalent shares outstanding have been adjusted for the effect of these stock dividends. In 2006, there were 15,450 stock options outstanding that were anti-dilutive since the exercise price exceeded the average market price. There were no anti-dilutive stock options outstanding during 2007 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 entity.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

	2007		2006		2005
Weighted average number of common shares used in computing basic net income per common share	7,527,997		7,623,532		7,635,271
Effect of ESOP shares	(145,964	)	(161,417	)	(175,741	)
Adjusted weighted average number of common shares used in computing basic net income per common share	7,382,033		7,462,115		7,459,530
Effect of dilutive stock options	100,328		112,741		181,806
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share	7,482,361		7,574,856		7,641,336

Recent Accounting Pronouncements

FIN 48

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations and unrecognized tax benefits as of December 31, 2007 and 2006 were immaterial. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statement of operations and interest and penalties recognized in 2007, 2006, and 2005 were immaterial. Fiscal years ending on or after December 31, 2003 are subject to examination by federal and state tax authorities.

SFAS 156

The provisions of Statement of Financial Accounting Standards No.156 (“SFAS 156”), Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 10, were effective beginning January 1, 2007. The adoption of the provisions of SFAS No. 156 had no effect on financial position or results of operations.

SFAS 157

Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of SFAS No. 157 on the consolidated financial statements.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

SFAS 159

Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company has chosen not to adopt the provision of SFAS 159 on an early basis. The Company has evaluated this statement and does not believe it will have a material effect on the Company’s consolidated financial statements.

EITF 06-4

The Emerging Issues Task Force (EITF) reached a consensus at its September 2006 meeting regarding EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. This EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company adopted EITF 06-4 on January 1, 2008 and it had the effect of reducing beginning consolidated undivided profits by approximately $273,000.

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

Reclassification

Certain amounts in the 2006 and 2005 financial statements have been reclassified to conform to the 2007 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities

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

December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	2,997	$	—	$	2	$	2,995
U.S. Government agencies		6,506		62		—		6,568
Mortgage-backed securities and CMO’s		28,179		197		84		28,292
State and political subdivisions		12,187		452		5		12,634
Corporate bonds		501		—		1		500
Total debt securities		50,370		711		92		50,989
Equity securities		8		8		—		16
Total securities available for sale	$	50,378	$	719	$	92	$	51,005
December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	2,992	$	—	$	78	$	2,914
U.S. Government agencies		7,509		—		149		7,360
Mortgage-backed securities and CMO’s		12,918		38		50		12,906
State and political subdivisions		12,931		521		26		13,426
Corporate bonds		514		6		—		520
Total debt securities		36,864		565		303		37,126
Equity securities		8		16		—		24
Total securities available for sale	$	36,872	$	581	$	303	$	37,150

Results from sales of securities available for sale for the years ended December 31, 2007, 2006 and 2005 are as follows:

	2007			2006		2005
	(dollars in thousands)
Gross proceeds from sales	$	4,643		$	2,885	$	1,295
Realized gains from sales	$	—		$	60	$	4
Realized losses from sales		(76	)		—		(20	)
Net realized gains (losses)	$	(76	)	$	60	$	(16	)

At December 31, 2007, 2006 and 2005 securities available for sale with a carrying amount of $15.2 million, $16.6 million and $13.1 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006. 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 are in no way a reflection of the quality of the investments. At December 31, 2007 the unrealized losses related to three U.S. Treasuries, one corporate bond, fifteen mortgage backed securities and CMOs, and four state and political subdivisions securities. All unrealized losses on investment securities are considered by management to be temporary given the credit ratings on these investment securities and management’s intent and ability to hold these investments until maturity.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

	Less than 12 Months				12 Months or More				Total
December 31, 2007	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
					(dollars in thousands)
Securities available for sale:
U.S. Treasury	$	—	$	—	$	2,995	$	2	$	2,995	$	2
Mortgage-backed securities and CMO’s		8,776		40		2,347		44		11,123		84
State and political subdivisions		751		5		—		—		751		5
	$	9,527	$	45	$	5,342	$	46	$	14,869	$	91
December 31, 2006
Securities available for sale:
U.S. Treasury	$	—	$	—	$	2,992	$	78	$	2,992	$	78
U.S. Government agencies		—		—		7,360		149		7,360		149
Mortgage-backed securities and CMO’s		7,391		38		1,684		12		9,075		50
State and political subdivisions		1,025		16		1,464		10		2,489		26
	$	8,416	$	54	$	13,500	$	249	$	21,916	$	303

Note 3 - Loans Held for Investment

The composition of net loans held for investment as of December 31, 2007 and 2006 is as follows:

	2007			2006
	(dollars in thousands)
Commercial	$	37,724		$	36,406
Real estate - construction		46,546			27,342
Real estate - residential		135,842			126,111
Real estate - commercial		86,593			84,744
Consumer		15,022			13,262
Other		143			133
		321,870			287,998
Less:
Allowance for loan losses		(3,510	)		(3,171	)
Deferred loan (fees) costs, net		117			137
Loans held for investment, net	$	318,477		$	284,964

Although the subsidiary banks’ loan portfolios are diversified, there is a concentration of mortgage real estate loans, primarily one to four family residential mortgage loans, which represent 42.20% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, to finance manufacturing buildings, shopping center locations, commercial land development, commercial buildings and equipment that comprise 26.90% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $7.5 million and $6.8 million at December 31, 2007 and 2006, respectively. The nonaccrual status of these loans had the effect of reducing net income by $6,077 in 2007 and $72,800 in 2006. Of the $7.5 million in impaired loans at December 31, 2007, $5.3 million carried an allowance of $1.3 million while $2.2 million were evaluated and required no specific allowance. Of the $6.8 million in impaired loans at December 31, 2006, $4.8 million carried an allowance of $1.6 million while $2.0 million required no specific allowance. The allowance for impaired loans amounted to $1.3 million at December 31, 2007 and $1.6 million at December 31, 2006. Loans past due 90 days and still accruing interest were $0 and $499,982 at December 31, 2007 and 2006, respectively. Restructured loans, excluding those included in impaired loans, amounted to $168,489 at December 31, 2007.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 - Loans Held for Investment (Continued)

The carrying value of foreclosed properties held as other real estate was $163,452 and $202,976 at December 31, 2007 and 2006, respectively.

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

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2007, 2006 and 2005 are presented below:

	2007			2006			2005
	(dollars in thousands)
Balance, beginning of year	$	3,171		$	4,482		$	4,983
Charge-offs		(224	)		(1,687	)		(1,378	)
Recoveries		548			78			122
Provision charged against income		15			298			755
Balance, end of year	$	3,510		$	3,171		$	4,482

Note 5 - Servicing Assets

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $205 million and $186 million at December 31, 2007 and 2006, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

	2007			2006			2005
	(dollars in thousands)
Beginning of year mortgage servicing rights:	$	1,244		$	1,138		$	1,236
Amounts capitalized		484			488			292
Amortization		(407	)		(382	)		(390	)
End of year	$	1,321		$	1,244		$	1,138

Amortization expense is estimated as follows:

Year ending December 31,
(dollars in thousands)
2008	$	312
2009		270
2010		228
2011		187
2012		145
Thereafter		179
Total	$	1,321

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2007 and 2006 are listed below:

	2007		2006
	(dollars in thousands)
Land	$	2,915	$	2,785
Building and improvements		6,579		6,280
Furniture and equipment		4,946		4,740
		14,440		13,805
Less accumulated depreciation		5,689		5,187
Total	$	8,751	$	8,618

The Company will begin renovations on one of their buildings during the first quarter of 2008. The contract bid for this project is $1.4 million. The Company has also entered into an agreement to purchase an adjacent piece of property for future parking needs for $255 thousand.

Note 7 - Leases

The Company’s subsidiary, Bank of Stanly has entered into a noncancelable operating lease for a branch location in Albemarle that expires in 2008, with annual rental payments of $19 thousand. The lease has one five year renewal option at the expiration of the initial term. Stanly has also entered into a noncancelable operating lease for a branch location in Locust that expires in 2008 with annual rental payments of $42 thousand. The lease has two one year renewal options at the expiration of the initial term.

The Company’s subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $60 thousand. The lease has two five year renewal options at the expiration of the initial term.

Future minimum lease payments under these leases for years subsequent to December 31, 2007 are as follows:

Year ending December 31,
(dollars in thousands)
2008	$	121
2009		120
2010		113
2011		79
2012		78
Thereafter		293
Total	$	804

Total rental expense related to the operating leases was $76,449, $23,807 and $18,575 for the years ended December 31, 2007, 2006 and 2005 respectively, and is included in occupancy expense.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 - Deposits

The composition of deposits at December 31, 2007 and 2006 is as follows:

	2007				2006
	Amount		Percentage of Total		Amount		Percentage of Total
	(dollars in thousands)
Demand deposits	$	46,597	14	%	$	48,149	16	%
Interest checking and money market		102,411	32	%		101,470	32	%
Savings		26,200	8	%		27,833	9	%
Time deposits $100,000 and over		54,729	17	%		48,450	16	%
Other time deposits		94,720	29	%		83,698	27	%
Total	$	324,657	100	%	$	309,600	100	%

The maturities of fixed-rate time deposits at December 31, 2007 are reflected in the table below:

Year ending December 31,	Time Deposits $100,000 and Over		Other Time Deposits
	(dollars in thousands)
2008	$	50,038	$	84,012
2009		3,674		6,783
2010		546		2,799
2011		471		778
2012		—		348
Total	$	54,729	$	94,720

Note 9 - Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2007 and 2006.

	2007				2006
At year-end	Amount		Rate		Amount		Rate
Federal funds purchased	$	5,900	4.60	%	$	—	—
Securities sold under repurchase agreements		1,604	2.82	%		2,025	4.31	%
Master notes		9,630	2.67	%		6,608	4.34	%
Notes payable		7	6.00	%		407	8.21	%
Short-term advances from FHLB		14,787	3.85	%		4,000	4.57	%
	$	31,928	3.58	%	$	13,040	3.12	%

27

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 - Short-Term Borrowed Funds (Continued)

	2007				2006
	Amount		Rate		Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	1,331	5.22	%	$	1,478	5.10	%
Securities sold under repurchase agreements		1,798	3.81	%		2,980	4.33	%
Master notes		12,058	3.95	%		7,692	4.29	%
Notes payable		302	6.22	%		407	6.94	%
Short-term advances from FHLB		13,882	3.54	%		4,129	4.15	%
	$	29,371	3.84	%	$	16,686	4.40	%

	2007		2006
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	6,150	$	11,000
Securities sold under repurchase agreements		2,194		3,439
Master notes		15,830		11,007
Notes payable		407		407
Short-term advances from FHLB		16,587		12,000

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

The subsidiary banks have combined available lines of credit for federal funds in the amount of $14.3 million at December 31, 2007.

Note 10 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans and commercial real estate loans with eligible collateral value of $79.6 million at December 31, 2007. The long-term advances under this line amounted to $15.0 million and $14.0 million at December 31, 2007 and 2006, respectively. Interest rates ranged from 2.96% to 7.52% in both 2007 and 2006. Two subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $14.0 million at December 31, 2007.

On April 30, 2001, the Company borrowed $4.0 million from a bank at an interest rate of prime less one percent. The note is payable in annual installments of $400 thousand. The balance outstanding at December 31, 2006 was $2.0 million. This loan was paid off on September 25, 2007.

On September 25, 2007, the Company borrowed $6.6 million from a bank at an interest rate of prime less one percent. This is a two year note that is payable at maturity, with interest payable quarterly.

On September 26, 2002, the Company issued $5.2 million of junior subordinated debentures to Uwharrie Statutory Trust I in exchange for the proceeds of the trust preferred securities issued

28

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 - Long-Term Debt (Continued)

by the Trust. The junior subordinated debentures were included in long-term debt and the Company’s equity interest in the Trust was included in other assets. The junior subordinated debentures paid interest quarterly at an annual rate, reset quarterly, equal to LIBOR plus 3.40%. The Company fully and unconditionally guaranteed the trust preferred securities through the combined operation of the junior subordinated debentures and other related documents. The Company’s obligation under the guarantee was unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities presently qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior subordinated debentures do not qualify as Tier 1 regulatory capital. On March 1, 2005, the Board of Governors of the Federal Reserve adopted a final rule that allows the continued limited inclusion of trust preferred securities in Tier 1 capital. The final rule limits trust preferred securities to 25 percent of all core capital elements, net of goodwill. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits.

On September 26, 2007, the Company redeemed the $5.2 million in junior subordinated debentures. After the redemption, the Company still remained well capitalized under the regulatory guidelines for bank holding companies.

On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $98,000 at December 31, 2007.

As of December 31, 2007, the scheduled maturities of these advances and notes payable are as follows:

Year ending December 31,
(dollars in thousands)
2009	$	9,608
2010		5,009
2011		6,009
2012		1,009
2013		9
Thereafter		47
Total	$	21,691

29

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 - Income Tax Matters

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

	2007			2006			2005
	(dollars in thousands)
Current tax expense:
Federal	$	844		$	217		$	379
State		238			177			92
Total		1,082			394			471
Deferred tax expense:
Federal		198			343			38
State		7			96			14
Total		205			439			52
Net provision for income taxes	$	1,287		$	833		$	523
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
	2007			2006			2005
	(dollars in thousands)
Tax computed at the statutory federal rate	$	1,443		$	987		$	693
Increases (decrease) resulting from:
Tax exempt interest, net		(245	)		(245	)		(224	)
State income taxes, net of federal benefit		162			143			70
Other		(73	)		(52	)		(16	)
Provision for income taxes	$	1,287		$	833		$	523
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31 are as follows:
	2007			2006			2005
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	935		$	912		$	1,496
Deferred compensation		357			316			279
Other		—			236			130
Valuation allowance		(10	)		(12	)		(8	)
Total deferred tax assets	$	1,282		$	1,452		$	1,897
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale	$	(241	)	$	(107	)	$	(206	)
Premises and equipment		(369	)		(364	)		(392	)
Deferred loans fees and costs		(213	)		(212	)		(218	)
Loan servicing		(78	)		(71	)		(60	)
Prepaid expenses		(110	)		(96	)		(79	)
Other		(8	)		—			—
Total deferred tax liabilities		(1,019	)		(850	)		(955	)
Net recorded deferred tax asset	$	263		$	602		$	942

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

30

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 - Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

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

The subsidiary banks’ risks of loss with the unfunded loans and lines of credit or standby letters of credit are represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. As of December 31, 2007 and 2006, outstanding financial instruments whose contract amounts represent credit risk were as follows:

	2007		2006
	(dollars in thousands)
Commitments to extend credit	$	79,162	$	73,450
Credit card commitments		9,017		7,672
Standby letters of credit		1,641		616
	$	89,820	$	81,738

Contingencies

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

Financial Instruments with Concentration of Credit Risk

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

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

Note 13 - Related Party Transactions

The Company has granted loans to certain directors and executive officers and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and,

31

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 - Related Party Transactions (Continued)

in management’s opinion, do not involve more than the normal risk of collectibility. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:

(dollars in thousands)

Balance at December 31, 2006	$	22,459
Disbursements during the year		7,733
Collections during the year		(14,380	)
Balance at December 31, 2007	$	15,812

At December 31, 2007, the Company had approved, but unused lines of credit, totaling $2.2 million to executive officers, directors, officers and their related interests.

Note 14 - Regulatory Matters

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

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

	Actual				Minimum For Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
December 31, 2007	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk
Weighted Assets:
Consolidated	$	33,713	10.2	%	$	26,346	8.00	%	$	32,933	10.00	%
Bank of Stanly		27,035	12.2	%		17,771	8.00	%		22,214	10.00	%
Anson Bank and Trust		4,511	12.5	%		2,880	8.00	%		3,600	10.00	%
Cabarrus Bank and Trust		7,693	10.9	%		5,653	8.00	%		7,067	10.00	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		30,200	9.2	%		13,173	4.00	%		19,760	6.00	%
Bank of Stanly		24,550	11.1	%		8,885	4.00	%		13,328	6.00	%
Anson Bank and Trust		4,123	11.5	%		1,440	4.00	%		2,160	6.00	%
Cabarrus Bank and Trust		7,053	10.0	%		2,827	4.00	%		4,240	6.00	%

32

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 - Regulatory Matters (Continued)

Tier I Capital to
Average Assets:
Consolidated		30,200	7.6	%		15,833	4.00	%		19,791	5.00	%
Bank of Stanly		24,550	9.1	%		10,775	4.00	%		13,468	5.00	%
Anson Bank and Trust		4,123	8.8	%		1,884	4.00	%		2,355	5.00	%
Cabarrus Bank and Trust		7,053	8.8	%		3,212	4.00	%		4,015	5.00	%
December 31, 2006
Total Capital to Risk
Weighted Assets:
Consolidated	$	36,778	12.7	%	$	23,107	8.00	%	$	28,884	10.00	%
Bank of Stanly		25,731	13.3	%		15,406	8.00	%		19,258	10.00	%
Anson Bank and Trust		4,320	13.5	%		2,563	8.00	%		3,203	10.00	%
Cabarrus Bank and Trust		7,013	11.0	%		5,116	8.00	%		6,395	10.00	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		33,601	11.6	%		11,554	4.00	%		17,330	6.00	%
Bank of Stanly		23,402	12.2	%		7,703	4.00	%		11,555	6.00	%
Anson Bank and Trust		3,983	12.4	%		1,281	4.00	%		1,922	6.00	%
Cabarrus Bank and Trust		6,502	10.2	%		2,558	4.00	%		3,837	6.00	%
Tier I Capital to
Average Assets:
Consolidated		33,601	8.8	%		15,249	4.00	%		19,061	5.00	%
Bank of Stanly		23,402	9.0	%		10,457	4.00	%		13,072	5.00	%
Anson Bank and Trust		3,983	8.8	%		1,856	4.00	%		2,320	5.00	%
Cabarrus Bank and Trust		6,502	8.1	%		3,223	4.00	%		4,029	5.00	%

As of December 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized all subsidiary banks as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorizations.

For the reserve maintenance period in effect at December 31, 2007, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $3.7 million as reserves on deposit liabilities.

Note 15 - Stock Matters

Employee Stock Plans

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2007, the SOP had 504,207 shares still outstanding and the SPP had no options outstanding.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules,

33

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Stock Matters (Continued)

generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2007, neither the SOP II nor the SPP II had options outstanding.

Activity under all option plans, reflecting the effects of the 3% stock dividends issued in 2007, 2006 and 2005, are as follows:

	2007				2006				2005
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding at the beginning of the year	535,546		$	4.59	703,650		$	4.32	723,440		$	4.22
Options granted	—			—	15,450			5.97	89,807			5.28
Options exercised	(13,144	)		2.74	(99,686	)		2.25	(75,565	)		4.47
Forfeitures	(18,195	)		5.46	(83,868	)		5.32	(34,032	)		4.60
Options outstanding at the end of the year	504,207		$	4.61	535,546		$	4.59	703,650		$	4.32
Options exercisable at the end of the year	473,088		$	4.55	454,272		$	4.45	540,794		$	4.03

At December 31, 2007, options outstanding had a weighted-average remaining term of 3.1 years. Total options outstanding at December 31, 2007 included 504,207 options exercisable at a range of $2.74 to $5.94 per share with a weighted average expected term of 3.1 years. Exercisable options at December 31, 2007 included 473,088 options exercisable at a range of $2.74 to $5.94 per share. At December 31, 2007, authorized shares of common stock reserved for future grants of options totaled 162,458 under the SOP II, and 100,227 under the SPP II.

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. Pursuant to stock repurchase authorizations and limitations, the Company purchased 237,669 shares during 2007 and 23,864 shares during 2006 at an aggregate purchase price of $1,403,749 and $145,093, respectively.

Note 16 - Employee and Director Benefit Plans

Employees’ Savings Plus and Profit Sharing Plan

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

The Company’s annual contribution to the plan was $192,776 in 2007, $169,982 in 2006 and $143,210 in 2005, determined as follows:

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

34

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Employee and Director Benefit Plans (Continued)

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

Directors’ Deferred Compensation Plan

On March 1, 1994, the Company established a Directors’ Deferred Compensation Plan in accordance with the laws of the State of North Carolina under which each Director could elect to defer receipt for services rendered to the Company as a Director during the term of his or her service by entering into a written deferred compensation election. This plan was closed to new participants in 2001; subsequently, only two directors continue to defer receipt of fees. The balance in deferred directors’ compensation, not yet disbursed, was $195,938 and $212,382 at December 31, 2007 and 2006, respectively. Expense for the years ended December 31, 2007, 2006 and 2005 was $12,956, $12,283 and $13,931, respectively.

Employee Stock Ownership Plan

The Company established an Employee Stock Ownership Plan (“ESOP”) to benefit all qualified employees. The ESOP purchased 284,676 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2007, the outstanding balance of the loan is $799,866 and is presented as a reduction of shareholders’ equity.

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

Expenses of $317,256, $237,022 and $251,437 during the years ended December 31, 2007, 2006 and 2005, respectively, have been incurred in connection with the ESOP. At December 31, 2007, 201,740 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP’s participants for purposes of computing earnings per share. The fair value of the unallocated shares amounted to approximately $783 thousand at December 31, 2007.

Supplemental Executive Retirement Plan

The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. The Company has purchased life insurance policies in order to provide future funding of benefit payments. Certain of the plan benefits will accrue and vest during the period of employment, and will be paid in fixed monthly benefit payments from ten to fifteen years commencing with the officer’s retirement at any time after attainment of the age specified in the

35

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Employee and Director Benefit Plans (Continued)

officer’s plan agreement. Other benefits will accrue based upon the performance of the underlying life insurance policies both during employment and after retirement. Such benefits will continue to accrue and be paid throughout the participant’s life assuming satisfactory performance of the funding life insurance policy. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

Effective July 1, 2007, this plan was amended and restated for all but one of the plan participants to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2007 will be transferred into a trust fund, where investments will be participant-directed. The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participant has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

During 2007, 2006 and 2005 a provision of $199,328, $23,446 and $137,688, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation deferred under the plan amounts to $731,010, and $531,682 at December 31, 2007 and 2006, respectively.

Split-Dollar Life Insurance

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

36

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2007 and 2006.

	2007				2006
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	16,197	$	16,197	$	34,760	$	34,760
Securities available for sale		51,005		51,005		37,150		37,150
Loans, net of unearned income and allowance for loan losses		318,477		322,115		284,964		287,974
Loans held for sale		2,916		2,917		3,814		3,818
Other financial assets		9,510		9,510		8,888		8,888
Financial Liabilities
Deposits	$	324,657	$	322,287	$	309,600	$	314,986
Short-term borrowings		31,928		31,928		13,040		13,040
Long-term debt		21,691		21,832		29,289		29,147
Other financial liabilities		596		596		503		503

At December 31, 2007, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 12.

Interest Rate Risk

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

37

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Parent Company Financial Data

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

Condensed Balance Sheets

	December 31,
	2007		2006
	(dollars in thousands)
Assets
Cash and demand deposits with bank subsidiaries	$	289	$	214
Interest-earning deposits with bank subsidiaries		9,830		6,865
Investments in:
Bank subsidiaries		37,100		35,045
Nonbank subsidiaries		252		511
Other assets		770		894
Total assets	$	48,241	$	43,529
Liabilities and shareholders’ equity
Master notes	$	9,630	$	6,608
Long-term debt		6,600		2,000
Junior subordinated debentures		—		5,155
Other liabilities		437		133
Shareholders’ equity		31,574		29,633
Total liabilities and shareholders’ equity	$	48,241	$	43,529

Condensed Statement of Operations

	2007			2006			2005
	(dollars in thousands)
Equity in earnings of subsidiaries	$	3,734		$	2,915		$	1,922
Interest income		493			354			175
Management and service fees		4,227			3,854			3,797
Other income		119			190			107
Interest expense		1,029			921			625
Other operating expense		4,978			4,537			4,030
Income tax benefit		(393	)		(216	)		(171	)
Net income	$	2,959		$	2,071		$	1,517

38

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows

	2007			2006			2005
	(dollars in thousands)
Cash flows from operating activities
Net income	$	2,959		$	2,071		$	1,517
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Equity in earnings of subsidiaries		(3,734	)		(2,915	)		(1,922	)
Decrease in other assets		618			1,020			524
Increase (decrease) in other liabilities		304			(61	)		(426	)
Net cash provided (used) by operating activities		147			115			(307	)
Cash flows from investing activities
Dividends received from subsidiaries		1,800			—			1,000
Net cash provided by investing activities		1,800			—			1,000
Cash flows from financing activities
Net increase (decrease) in master notes		3,022			2,153			(576	)
Net increase (decrease) in long-term debt		4,600			(400	)		(400	)
Net decrease in subordinated debentures		(5,155	)		—			—
Repurchase of common stock		(1,404	)		(145	)		(1,214	)
Proceeds from issuance of common stock		36			224			347
Tax benefit of stock options exercised		3			48			31
Cash paid for fractional shares		(9	)		(9	)		(9	)
Net cash provided (used) by financing activities		1,093			1,871			(1,821	)
Net increase (decrease) in cash and cash equivalents		3,040			1,986			(1,128	)
Cash and cash equivalents at beginning of period		7,079			5,093			6,221
Cash and cash equivalents at end of period	$	10,119		$	7,079		$	5,093

39

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Quarterly Financial Data

	First			Second			Third			Fourth
	(in thousands, except per share data)
2007
Interest income	$	6,542		$	6,650		$	6,846		$	6,871
Interest expense		(3,058	)		(2,972	)		(2,964	)		(2,882	)
Net interest income		3,484			3,678			3,882			3,989
Provision for loan losses		—			138			(18	)		(135	)
Net interest income after provision for loan losses		3,484			3,816			3,864			3,854
Noninterest income		1,542			1,492			1,660			1,896
Noninterest expense		(4,083	)		(4,273	)		(4,414	)		(4,592	)
Income before taxes		943			1,035			1,110			1,158
Income taxes		285			318			336			348
Net income	$	658		$	717		$	774		$	810
Net income per common share
Basic	$	0.09		$	0.10		$	0.10		$	0.11
Diluted	$	0.09		$	0.10		$	0.10		$	0.11
	First			Second			Third			Fourth
	(in thousands, except per share data)
2006
Interest income	$	5,477		$	5,972		$	6,412		$	6,492
Interest expense		(2,171	)		(2,562	)		(2,960	)		(3,009	)
Net interest income		3,306			3,410			3,452			3,483
Provision for loan losses		(145	)		(99	)		(54	)		—
Net interest income after provision for loan losses		3,161			3,311			3,398			3,483
Noninterest income		1,261			1,277			1,437			1,494
Noninterest expense		(3,856	)		(4,002	)		(3,900	)		(4,160	)
Income before taxes		566			586			935			817
Income taxes		140			145			282			266
Net income	$	426		$	441		$	653		$	551
Net income per common share
Basic	$	0.06		$	0.06		$	0.09		$	0.07
Diluted	$	0.06		$	0.06		$	0.09		$	0.06

40

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(In Thousands Except Per Share and Shares Outstanding Information)

	2007			2006			2005			2004			2003
Summary of Operations
Interest income	$	26,909		$	24,353		$	19,161		$	15,906		$	14,597
Interest expense		11,876			10,702			6,630			4,734			4,606
Net interest income		15,033			13,651			12,531			11,172			9,991
Provision for loan losses		15			298			755			2,092			593
Noninterest income		6,590			5,469			4,351			4,271			5,159
Noninterest expense		17,362			15,918			14,087			13,297			12,466
Income taxes		1,287			833			523			(199	)		531
Net income	$	2,959		$	2,071		$	1,517		$	253		$	1,560
Per Common Share
Net income – basic (1)	$	0.40		$	0.28		$	0.20		$	0.03		$	0.20
Net income – diluted (1)		0.40			0.27			0.20			0.03			0.20
Book value (1)		4.26			3.87			3.62			3.52			3.54
Weighted Average Shares
Outstanding:
Basic (1)		7,382,033			7,462,115			7,459,530			7,582,331			7,594,285
Diluted (1)		7,482,361			7,574,856			7,641,336			7,759,854			7,736,441
Ratios
Return on average assets		0.75	%		0.56	%		0.45	%		0.08	%		0.57	%
Return on average equity		9.73	%		7.32	%		5.58	%		0.91	%		5.78	%
Average equity to average assets		7.73	%		7.67	%		8.14	%		8.64	%		9.86	%
Selected Year-end Balances
Assets	$	411,944		$	383,261		$	350,190		$	329,262		$	300,529
Loans held for investment		321,987			288,135			272,842			260,835			235,151
Securities		51,005			37,150			35,016			28,524			27,707
Deposits		324,657			309,600			273,976			246,939			212,563
Borrowed funds		53,619			42,329			47,007			53,796			58,924
Shareholders’ equity		31,574			29,633			27,453			27,156			27,852
Selected Average Balances
Assets	$	393,188		$	368,781		$	334,193		$	321,093		$	273,679
Loans held for investment		308,149			293,394			267,164			256,525			221,158
Securities		41,188			35,227			29,038			28,846			27,281
Deposits		312,261			289,742			254,591			234,424			188,803
Borrowed funds		48,075			48,510			50,265			57,296			56,263
Shareholders’ equity		30,402			28,299			27,187			27,741			26,980

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2003 through 2007 have been adjusted to reflect 3% stock dividends issued in 2007, 2006, 2005, 2004 and 2003.

41

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 8-40. References to changes in assets and liabilities represent end of period balances unless otherwise noted. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect 3% stock dividends in 2007, 2006 and 2005. Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Financial Condition at December 31, 2007 and December 31, 2006

The Company’s total assets increased $28.6 million or 7.5% from $383.3 million at December 31, 2006 to $411.9 million at December 31, 2007. This increase resulted primarily from a $33.9 million increase in loans held for investment and a $13.8 million increase in securities available for sale. These increases were offset by a decrease of $18.6 million in cash and cash equivalents.

Loans held for investment increased $33.9 million, from $288.1 million at December 31, 2006 to $322.0 million at December 31, 2007, an increase of 11.8%. The growth was largely due to the 12.9%, or $30.8 million, increase in our loans secured by real estate. Our commercial and consumer portfolios experienced growth as well. Loans held for sale decreased $898 thousand, or 23.54%, for the period. At December 31, 2007 the allowance for loan losses was $3.5 million which represents 1.09% of the loan held for investment portfolio.

Investment securities increased 37.3% during 2007, from $37.2 million at December 31, 2006 to $51.0 million at December 31, 2007. Throughout the year we invested in mortgage backed securities and US Government Agencies. Mortgage backed securities increased $15.4 million, or 119.2%, during the period. During the year the Company executed a transaction selling $4.0 million in US Government Agencies realizing a loss of $75 thousand and reinvested the proceeds to improve its yield. The Company also had an additional sale realizing a loss of $1 thousand.

Cash and cash equivalents decreased by $18.6 million during 2007. This decrease was generated by a $17.5 million, or 100%, decrease in federal funds sold. At December 31, 2006 the Company had made a decision to keep a portion of its investments in short-term federal funds. During 2007 this short-term investment was used to fund growth in both our investment and loan portfolios resulting in an improved yield. Cash and due from banks declined $1.3 million while interest earning deposits with banks grew $285 thousand.

42

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Other changes in our consolidated assets related to premises and equipment, interest receivable, Federal Home Loan Bank stock and bank owned life insurance. Premises and equipment increased due to the opening of a new retail branch in 2007, while interest receivable grew $280 thousand or 15.8% impacted by both loan and investment growth. Federal Home Loan Bank stock increased $157 thousand. Federal Home Loan Bank stock ownership is a requirement for member banks that utilize Federal Home Loan Bank for borrowing funds. The amount of stock owned by each member bank is based primarily on the amount of borrowings outstanding. Bank owned life insurance also experienced growth of $185 thousand.

Customer deposits continued to be our principal funding source in 2007, allowing us to fund the growth in assets discussed above. At December 31, 2007, deposits from our customers totaled $324.7 million, an increase of $15.1 million, or 4.9%, from $309.6 million at December 31, 2006. Time deposits grew $17.3 million, or 13.1%, during the period, while interest checking and money market accounts increased $941 thousand, or 0.9%. Offsetting the growth in the aforementioned areas were declines in savings accounts of 5.9%, or $1.6 million and demand, noninterest bearing of $1.6 million. During the past year with the increasing interest rate environment our customers have been moving their interest earning deposits into higher yielding deposit accounts.

The aforementioned growth in the loan and investment portfolios required the Company to increase net borrowings by $11.3 million during 2007. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2007, $29.8 million of the total borrowings of $53.6 million were attributed to Federal Home Loan Bank advances.

The Company had long-term debt of $5.2 million of junior subordinated debentures to Uwharrie Statutory Trust I, issued in 2002, in exchange for the proceeds of the trust preferred securities issued by the Trust. The junior subordinated debentures were incurred in long-term debt and were redeemable on September 26, 2007 or afterwards. The annual interest rate was LIBOR plus 3.40%. During the third quarter, the Company made a decision to help improve its interest margin by refinancing the subordinated debt. The Company redeemed the debt during 2007, however market rates increased during the process and the replacement of the subordinated debt was placed on hold pending more favorable market conditions. The Company did replace the debt with other shorter term borrowings.

At December 31, 2007, total shareholders’ equity was $31.6 million, an increase of $2.0 million from December 31, 2006. Net income for the period was $2.9 million and the Company received $36 thousand from the exercise of stock options. Unrealized gains on investment securities, net of tax, increased $217 thousand. These increases were offset by the repurchase of 237,669 shares of the Company’s common stock at a cost of $1.4 million.

Results of Operations for the Years Ended December 31, 2007 and 2006

Earnings

The Company earned net income of $2.9 million, or $0.40, per basic share for 2007 as compared with net income of $2.1 million, or $0.28 per basic share, in 2006.

43

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Net Interest Income

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

Net interest income increased $1.4 million to $15.0 million for 2007 compared to the $13.6 million earned in 2006. During 2007 with the interest rates stabilizing the increase in net interest income resulted from growth in the loan and investment portfolio. The average yield on our interest-earning assets increased 24 basis points to 7.49%, while the average rate we paid for our interest-bearing liabilities increased 11 basis points. These increases resulted in an increase of 13 basis points in our interest rate spread, from 3.57% in 2006 to 3.70% in 2007. Our net interest margin for 2007 was 4.22%, compared to 4.10% in 2006. Financial Table 1 on page 52 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 53 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $15 thousand and $298 thousand for the twelve months ended December 31, 2007 and 2006 respectively. There were net loan recoveries of $324 thousand for the twelve months ended December 31, 2007 as compared with net loan charge-offs of $1.6 million during the same period of 2006. Refer to the Asset Quality discussion beginning on page 46 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income increased 20.5%, from $5.5 million in 2006 to $6.6 million in 2007, an increase of $1.1 million. Income generated from brokerage commissions and asset management fees increased $554 thousand to $1.9 million, while other banking fees increased $214 thousand or 21.8% during 2007. Service charges on deposit accounts grew $188 thousand to $2.2 million. The Company also benefited from an increase in income from mortgage loan sales of $193 thousand resulting from an increase in mortgage loan originations. During 2007, the Company sold investment securities realizing a loss of $76 thousand, while other income increased $108 thousand.

Noninterest Expense

Noninterest expense increased $1.4 million to $17.4 million in 2007 compared to $15.9 million in 2006. Salaries and employee benefits, the largest component of noninterest expense, increased $1.0 million, from $9.1 million in 2006 to $10.1 million in 2007. Additions at the executive and bank support staff levels together with normal salary increases, primarily account for this increase. Other noninterest expense increased $475 thousand for the year, including electronic

44

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

banking expense, a major component of this category, which increased by $102 thousand. Increased usage of electronic banking products is the reason for the increase. Professional fees and services, another component of this category, also increased $102 thousand. This increase was primarily due to compliance with Sarbanes Oxley. At the end of 2006, the remaining costs associated with a core system conversion were amortized off, resulting in a decrease in data processing costs of $197 thousand. In relation to the aforementioned discussion on the subordinated debt, the Company expensed $126 thousand in remaining unamortized issue costs during third quarter contributing to the increase in other noninterest expense.

Income Tax Expense

The Company had income tax expense of $1.3 million for 2007 at an effective tax rate of 30.3% compared to income tax expense of $833 thousand in 2006 at an effective tax rate of 28.7%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance. The growth in taxable income out paced the growth in nontaxable income resulting in the increase in the effective tax rate.

Results of Operations for the Years Ended December 31, 2006 and 2005

Earnings

The Company earned net income of $2.1 million, or $0.28 per basic share for 2006 as compared with net income of $1.5 million, or $0.20 per basic share, in 2005.

Net Interest Income

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

Net interest income increased $1.1 million to $13.6 million for 2006 compared to the $12.5 million earned in 2005. During 2006 with the interest rates stabilizing the increase in net interest income resulted from growth in the loan and investment portfolio. The average yield on our interest-earning assets increased 87 basis points to 7.25%, while the average rate we paid for our interest-bearing liabilities increased 114 basis points. These increases resulted in a decrease of 27 basis points in our interest rate spread, from 3.84% in 2005 to 3.57% in 2006. Our net interest margin for 2006 was 4.10%, compared to 4.21% in 2005. Financial Table 1 on page 52 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 53 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

45

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Provision and Allowance for Loan Losses

The provision for loan losses was $298 thousand and $755 thousand for the twelve months ended December 31, 2006 and 2005 respectively. There were net loan charge-offs of $1.6 million for the twelve months ended December 31, 2006 as compared with net loan charge-offs of $1.3 million during the same period of 2005. Refer to the Asset Quality discussion beginning on page 46 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income increased 25.7%, from $4.4 million in 2005 to $5.5 million in 2006, an increase of $1.1 million. Income generated from brokerage commissions and asset management fees increased $424 thousand to $1.3 million, while other banking fees increased $177 thousand or 21.9% during 2006. Service charges on deposit accounts grew $293 thousand to $2.0 million. During 2005, the Company implemented a new non-sufficient funds program. This new program along with the growth in demand deposit accounts resulted in a $348 thousand increase in NSF fees. The Company also benefited from an increase in income from mortgage loan sales of $210 thousand resulting in an increase in mortgage loan originations. During 2006, the Company sold investment securities realizing a gain of $60 thousand. These increases were offset by a decline in other income of $62 thousand.

Noninterest Expense

Noninterest expense increased $1.8 million to $15.9 million in 2006 compared to $14.1 million in 2005. Salaries and employee benefits, the largest component of noninterest expense, increased $1.1 million, from $8.0 million in 2005 to $9.1 million in 2006. Additions at the executive and bank support staff levels together with normal salary increases, primarily account for this increase. Data processing costs increased 11.4% or $96 thousand in 2006 with growth in loans and deposits. Other noninterest expense increased $560 thousand for the year, including electronic banking expense, a major component of this category, which increased by $276 thousand. Increased usage of electronic banking products is the reason for the increase. Marketing and donations another component of this category increased $235 thousand.

Income Tax Expense

The Company had income tax expense of $833 thousand for 2006 at an effective tax rate of 28.7% compared to income tax expense of $523 thousand in 2005 at an effective tax rate of 25.6%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance. The growth in taxable income out paced the growth in nontaxable income resulting in the increase in the effective tax rate.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and by recoveries of amounts previously charged off, and reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels,

46

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

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 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 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 declined from $298 thousand in 2006 to $15 thousand in 2007, a decrease of $283 thousand. This decline in the level of our provision in 2007 resulted primarily from recoveries totaling approximately $317 thousand on two loans charged off in prior years. Impaired loans, which include all loans in nonaccrual status and other loans deemed by management to be impaired, were $7.5 million at December 31, 2007 compared to $6.8 million at December 31, 2006 resulting in an increase of $701 thousand. Total nonaccrual, which are a

47

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

component, increased from $1.2 million at December 31, 2006 to $1.8 million at December 31, 2007. The level of specific reserves identified for impaired loans decreased by $370 thousand. The decline in the level of specific reserves for impaired loans resulted from the Company’s continued efforts in improving its collateral positions. The Company had net loan recoveries in 2007 of $324 thousand compared to net loan charge-offs of $1.6 million in 2006. Three loans which were impaired as of December 31, 2005 accounted for $1.4 million of the total $1.6 million in net charge-offs in 2006.

The allowance expressed as a percentage of gross loans held for investment decreased 1 basis point from 1.10% at December 31, 2006 to 1.09% at December 31, 2007. The allowance, as a percentage of total impaired loans, decreased from 51.2% at December 31, 2006 to 35.7% at December 31, 2007. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 24.0% at December 31, 2006 to 16.8% at December 31, 2007. Nonperforming loans, which consist solely of nonaccrual loans, were $1.8 million at December 31, 2007 as compared to $1.2 million at December 31, 2006. Nonperforming loans to total loans increased from 0.42% at December 31, 2006, to 0.56% at the end of 2007. The total allowance relative to non-performing loans decreased from 261.8% at the end of 2006 to 195.6% at this year end. Management believes the current level of allowance for loan losses to be adequate at this time.

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

Nonperforming Assets
(dollars in thousands)
	At December 31,
	2007			2006			2005			2004			2003
Nonperforming Assets:
Nonaccrual loans	$	1,795		$	1,211		$	1,875		$	3,376		$	1,577
Other real estate owned		163			203			169			481			108
Total nonperforming assets	$	1,958		$	1,414		$	2,044		$	3,857		$	1,685
Accruing loans past due 90 days or more	$	—		$	500		$	339		$	1,150		$	607
Allowance for loan losses		3,510			3,171			4,482			4,983			3,224
Nonperforming loans to total loans		0.56	%		0.42	%		0.69	%		1.30	%		0.67	%
Allowance for loan losses to total loans		1.09	%		1.10	%		1.64	%		1.92	%		1.37	%
Nonperforming assets to total loans and other real estate		0.61	%		0.49	%		0.75	%		1.47	%		0.72	%
Nonperforming assets to total assets		0.48	%		0.37	%		0.58	%		1.17	%		0.56	%
Allowance for loan losses to nonperforming loans		195.57	%		261.78	%		239.09	%		147.59	%		204.44	%

Capital Resources

The Company continues to maintain good capital ratios that support its asset growth. The capital position is maintained through the retention of earnings and controlled growth. Regulatory agencies divide capital into Tier I (consisting of shareholders’ equity less ineligible

48

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier II (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company’s risk-adjusted assets and off-balance sheet items. In addition to these capital ratios, regulatory agencies have established a Tier I leverage ratio that measures Tier I capital to average assets less ineligible intangible assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier I leverage ratio of 4%. Banks which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a Tier I leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2007, the Company and its subsidiary banks were all well capitalized.

The Company expects to continue to exceed these minimums without altering current operations or strategy. The Company does however plan to do a private placement of subordinated debt during the first half of 2008 that will qualify as regulatory capital. Note 14 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

Dividends

The Board of Directors of Uwharrie Capital Corp declared a 3% stock dividend in 2007, 2006, and in 2005. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends.

Liquidity

Liquidity, the ability to raise cash when needed without adversely impacting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 4 on page 55, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2007 included $14.3 million in federal funds lines of credit from correspondent banks and approximately $35.8 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.

At December 31, 2007, borrowings from federal funds lines and securities sold under repurchase agreements amounted to $7.5 million, while other short-term borrowings totaled $24.4 million. Long-term debt at that date consisted of advances of $15.0 million from the Federal Home Loan Bank, a note payable of $6.6 million to another bank, and a mortgage payable of $91 thousand.

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

49

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2007.

	Payments Due by Period (in thousands)
	Total		On Demand or less than 1 year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Short-term debt	$	31,928	$	31,928	$	—	$	—	$	—
Long-term debt		21,691		—		20,626		1,018		47
Operating leases		804		121		233		157		293
Property purchase		255		255		—		—		—
Building construction		1,365		1,365		—		—		—
Total contractual cash obligations, excluding deposits		55,788		33,414		20,859		1,175		340
Deposits		324,657		309,258		13,802		1,597		—
Total contractual cash obligations, including deposits	$	380,700	$	342,927	$	34,661	$	2,772	$	340

Critical Accounting Policy

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

Off-Balance Sheet Arrangements

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

Interest Rate Sensitivity

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

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 2007 is reflected in Financial Table 3 on page 54. While management reviews this information, it has implemented the use of a simulation model which calculates

50

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

expected net interest income based on projected interest-earning assets, interest-bearing liabilities and interest rates and provides a more relevant view of interest rate risk than traditional gap tables. The simulation allows comparison of flat, rising and falling rate scenarios to determine sensitivity of earnings to changes in interest rates.

The Company models immediate rising and declining rate shocks of 2% on its subsidiary banks as preferred by regulators. The most recent consolidated 2% rate shock projections from the asset liability model, measured over a twelve-month period, indicate a negative impact of 8.08% on net interest income in a rates down scenario and a negative impact of 1.71% on net interest income in a rates up environment. Two of the subsidiary banks are asset sensitive and typically have some negative impact when rates decline, since the majority of interest bearing assets will reprice more quickly than the interest bearing liabilities. The other bank is liability sensitive, with the opposite effect, and the blend provides some balance in the consolidated results.

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

51

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 1

Average Balances and Net Interest Income Analysis
(dollars in thousands)
	2007						2006						2005
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income Expense		Average Yield Rate (1)
Interest-earning assets
Taxable securities	$	30,364	$	1,711	5.63	%	$	25,741	$	1,266	4.92	%	$	19,363	$	881	4.55	%
Non-taxable securities (1)		12,847		549	6.95	%		11,586		517	7.26	%		11,962		533	7.25	%
Short-term investments		14,219		733	5.16	%		11,274		611	5.42	%		8,740		302	3.46	%
Taxable loans (2)		304,195		23,724	7.80	%		289,194		21,758	7.52	%		263,168		17,252	6.56	%
Non-taxable loans (1)		3,954		192	7.90	%		4,200		201	7.79	%		3,996		193	7.86	%
Total interest-earning assets		365,579		26,909	7.49	%		341,995		24,353	7.25	%		307,229		19,161	6.38	%
Non-earning assets
Cash and due from banks		11,253						11,833						11,904
Premises and equipment, net		8,694						8,419						8,367
Interest receivable and other		7,662						6,534						6,693
Total non-earning assets		27,609						26,786						26,964
Total assets	$	393,188					$	368,781					$	334,193
Interest-bearing liabilities
Savings deposits	$	26,635	$	526	1.97	%	$	32,304	$	734	2.27	%	$	37,987	$	580	1.53	%
Interest checking & MMDA		102,643		2,550	2.48	%		89,174		2,342	2.63	%		72,755		1,002	1.38	%
Time deposits		136,217		6,454	4.74	%		121,053		5,191	4.29	%		99,704		2,891	2.90	%
Total deposits		265,495		9,530	3.59	%		242,531		8,267	3.41	%		210,446		4,473	2.13	%
Short-term borrowed funds		27,742		1,128	4.07	%		17,928		758	4.23	%		12,992		354	2.72	%
Long-term debt		20,333		1,218	5.99	%		30,582		1,677	5.48	%		37,273		1,803	4.84	%
Total interest-bearing Liabilities		313,570		11,876	3.79	%		291,041		10,702	3.68	%		260,711		6,630	2.54	%
Noninterest liabilities
Transaction deposits		46,766						47,210						44,145
Interest payable and other		2,450						2,231						2,150
Total liabilities		362,786						340,482						307,006
Shareholders’ equity		30,402						28,299						27,187
Total liabilities and Shareholders equity	$	393,188					$	368,781					$	334,193
Interest rate spread					3.70	%					3.57	%					3.84	%
Net interest income and net interest margin			$	15,033	4.22	%			$	13,651	4.10	%			$	12,531	4.21	%

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

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

52

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)

	2007 Versus 2006									2006 Versus 2005
	Volume			Rate			Net Change			Volume			Rate			Net Change
Interest-earning assets
Taxable securities	$	244		$	201		$	445		$	302		$	83		$	385
Non-taxable securities		55			(23	)		32			(17	)		1			(16	)
Short-term investments		156			(34	)		122			112			197			309
Taxable loans		1,149			817			1,966			1,832			2,674			4,506
Non-taxable loans		(12	)		3			(9	)		10			(2	)		8
Total interest-earning assets		1,592			964			2,556			2,239			2,953			5,192
Interest-bearing liabilities
Savings deposits		(120	)		(88	)		(208	)		(108	)		262			154
Transaction and MMDA deposits		344			(136	)		208			329			1,011			1,340
Other time deposits		684			579			1,263			767			1,533			2,300
Short-term borrowed funds		407			(37	)		370			172			232			404
Long-term debt		(588	)		129			(459	)		(345	)		219			(126	)
Total interest-bearing liabilities		727			447			1,174			815			3,257			4,072
Net interest income	$	865		$	517		$	1,382		$	1,424		$	(304	)	$	1,120

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

53

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 3

Interest Rate Sensitivity Analysis

(dollars in thousands)

	1-90 Day Position			3-6 Month Position			6-12 Month Position			1-5 Year Position			> 5 Year Position			Total Position
Interest-earning assets
Interest-earning deposits with banks	$	2,432		$	—		$	—			—		$	—		$	2,432
Investment securities		166			103			7,272			4,042			39,422			51,005
FHLB and other stock		—			—			—			—			2,209			2,209
Loans held for sale		2,916			—			—			—			—			2,916
Loans held for investment		189,858			6,822			13,721			76,133			35,453			321,987
Total interest-earning assets		195,372			6,925			20,993			80,175			77,084			380,549
Interest-bearing liabilities
Deposits		42,567			60,318			72,353			93,517			9,305			278,060
Short-term borrowed funds		31,928			—			—			—			—			31,928
Long-term debt		—			—			—			21,635			56			21,691
Total interest-bearing liabilities		74,995			60,318			72,353			115,152			9,361			331,679
Interest sensitivity GAP per period	$	120,877		$	(53,393	)	$	(51,360	)	$	(34,977	)	$	67,723		$	48,870
Cumulative interest sensitivity GAP	$	120,877		$	67,484		$	16,124		$	(18,853	)	$	48,870		$	48,870
Ratios
Cumulative gap as a percentage of total interest-earning assets		31.76	%		17.73	%		4.24	%		(4.95	)%		12.84	%		12.84	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		262.26	%		150.06	%		107.78	%		94.15	%		114.73	%		114.73	%

54

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 4

Investment Securities Portfolio Analysis

(dollars in thousands)

	December 31, 2007
	Amortized Cost		Estimated Fair Value		Book Yield(1)
Securities available for sale
U.S. Treasury
Due within one year	$	2,997	$	2,995	3.11	%
U.S. Government agencies
Due within one year		3,995		4,017	3.94	%
Due after one but within five years		2,511		2,551	4.34	%
		6,506		6,568	4.09	%
Mortgage-backed securities
Due within one year		2		2	6.50	%
Due after five but within ten year		2,617		2,642	5.28	%
Due after ten years		25,560		25,648	5.74	%
		28,179		28,292	5.70	%
State and political
Due within one year		503		511	8.84	%
Due after one but within five years		1,440		1,492	8.58	%
Due after five but within ten year		3,647		3,775	7.79	%
Due after ten years		6,597		6,856	8.49	%
		12,187		12,634	8.31	%
Corporate Bond
Due after ten years		501		500	3.23	%
Equity Securities
Due within one year		8		16	9.61	%
Total Securities available for sale
Due within one year		7,505		7,541	3.94	%
Due after one but within five years		3,951		4,043	5.89	%
Due after five but within ten year		6,264		6,417	6.74	%
Due after ten years		32,658		33,004	6.26	%
	$	50,378	$	51,005	5.94	%

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

55

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 5

Noninterest Income

(dollars in thousands)

	Year Ended December 31,
	2007			2006			2005
Service charges on deposit accounts	$	2,188		$	2,000		$	1,707
Other banking fees		1,198			984			807
Asset management fees		1,473			974			497
Brokerage commissions		426			371			424
Other noninterest income		400			348			290
Core noninterest income		5,685			4,677			3,725
Income from mortgage loan sales		957			764			554
Security gains (losses)		(76	)		60			(16	)
Gains (losses) from sale of OREO		(2	)		(23	)		12
Other gains (losses) from sale of assets		26			(9	)		76
Total noninterest income	$	6,590		$	5,469		$	4,351
Financial Table 6 Other Noninterest Expense (dollars in thousands)
	Year Ended December 31,
	2007			2006			2005
Professional fees and services	$	720		$	618		$	456
Marketing and donations		639			669			434
Office supplies and printing		277			280			260
Postage		173			192			167
Telephone and data lines		232			212			200
Electronic banking expense		706			604			328
Software amortization and maintenance		448			372			257
Loan collection cost		140			172			299
Subordinated debt issue costs		130			5			5
Other		1,660			1,396			1,554
Total other noninterest expense	$	4,995		$	4,520		$	3,960

56

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 7

Loan Portfolio Composition

(dollars in thousands)

	At December 31,
	2007					2006					2005
	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans
Loan type:
Commercial	$	37,724		11.72	%	$	36,406		12.64	%	$	37,299		13.68	%
Real estate - construction		46,546		14.46	%		27,342		9.49	%		21,206		7.78	%
Real estate - residential		135,842		42.21	%		126,111		43.79	%		116,715		42.81	%
Real estate - commercial		86,593		26.90	%		84,744		29.43	%		83,861		30.76	%
Consumer		15,022		4.67	%		13,262		4.60	%		13,479		4.94	%
Other		143		0.04	%		133		0.05	%		72		0.03	%
Total loans		321,870		100.00	%		287,998		100.00	%		272,632		100.00	%
Less:
Allowance for loan losses		(3,510	)				(3,171	)				(4,482	)
Unearned net loan fees		117					137					210
Net loans	$	318,477				$	284,964				$	268,360

	At December 31,
	2004					2003
	Amount			% of Total Loans		Amount			% of Total Loans
Loan type:
Commercial		$37,718		14.47	%	$	38,517		16.38	%
Real estate - construction		25,480		9.77	%		21,813		9.28	%
Real estate - residential		102,627		39.38	%		76,933		32.72	%
Real estate - commercial		81,283		31.18	%		84,920		36.12	%
Consumer		13,488		5.17	%		12,741		5.42	%
Other		90		0.03	%		187		0.08	%
Total loans	$	260,686		100.00	%		235,111		100.00	%
Less:
Allowance for loan losses		(4,983	)				(3,224	)
Unearned net loan fees		149					40
Net loans	$	255,852				$	231,927

57

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 8

Selected Loan Maturities

(dollars in thousands)

	December 31, 2007
	One Year or Less		One to Five Years		Over Five Years		Total
Commercial and agricultural	$	17,202	$	15,365	$	5,157	$	37,724
Real estate – construction		32,034		12,629		1,883		46,546
Total selected loans	$	49,236	$	27,994	$	7,040	$	84,270
Fixed rate loans	$	32,396	$	76,133	$	35,453	$	143,982
Sensitivity to rate changes:
Variable interest rates	$	178,005	$	—	$	—	$	178,005

58

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 9

Activity in the Allowance for Loan Loss

(dollars in thousands)

	At or for the Year Ended December 31,
	2007			2006			2005			2004			2003
Allowance for loan losses at beginning of year	$	3,171		$	4,482		$	4,983		$	3,224		$	2,755
Provision for loan losses		15			298			755			2,092			593
Loan charge-offs:
Commercial		—			1,533			1,124			224			10
Real estate		—			14			—			—			45
Consumer		224			140			254			149			95
Total charge-offs		224			1,687			1,378			373			150
Recoveries of loans previously charged off:
Commercial		440			34			3			1			—
Real estate		—			—			—			—			1
Consumer		108			44			119			39			25
Total recoveries		548			78			122			40			26
Net charge-offs (recoveries)		(324	)		1,609			1,256			333			124
Allowance for loan losses at end of year	$	3,510		$	3,171		$	4,482		$	4,983		$	3,224
Net (charge-offs) recoveries as a percent of average loans		0.11	%		(0.55	)%		(0.47	)%		(0.13	)%		(0.06	)%

59

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 10

Allocation of the Allowance for Loan Losses

(dollars in thousands)

	At December 31,
	2007				2006				2005
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
Commercial	$	326	11.72	%	$	356	12.64	%	$	2,474	13.68	%
Real estate - construction		325	14.46	%		255	9.49	%		101	7.78	%
Real estate - residential		922	42.21	%		1,235	43.79	%		323	42.81	%
Real estate - commercial		1,715	26.90	%		1,123	29.43	%		1,159	30.76	%
Consumer loans		222	4.67	%		202	4.60	%		369	4.94	%
Other		—	0.04	%		—	0.05	%		—	—	%
Unallocated		—	—	%		—	—	%		56	0.03	%
Total loans	$	3,510	100.00	%	$	3,171	100.00	%	$	4,482	100.00	%

	At December 31,
	2004				2003
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
Commercial	$	897	14.47	%	$	1,204	16.38	%
Real estate - construction		185	9.77	%		171	9.28	%
Real estate - residential		509	39.38	%		472	32.72	%
Real estate - commercial		2,965	31.18	%		877	36.12	%
Consumer		359	5.17	%		450	5.42	%
Other		—	—	%		—	—	%
Unallocated		68	0.03	%		50	0.08	%
Total loans	$	4,983	100.00	%	$	3,224	100.00	%

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

60

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

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

Financial Table 11

Maturities of Time Deposits of $100,000 or More

(dollars in thousands)

	3 Months or Less			Over 3 Months to 6 Months			Over 6 Months to 12 Months			Over 12 Months			Total
Time Deposits of $100,000 or more	$	12,292		$	15,806		$	21,940		$	4,691		$	54,729
Financial Table 12 Securities Performance Ratios
	At December 31,
	2007			2006			2005			2004			2003
Return on average assets		0.75	%		0.56	%		0.45	%		0.08	%		0.57	%
Return on average equity		9.73	%		7.32	%		5.58	%		0.91	%		5.78	%
Equity to average assets ratio		7.73	%		7.67	%		8.14	%		8.64	%		9.86	%

61

UWHARRIE CAPITAL CORP Board of Directors
Joe S. Brooks	B. Franklin Lee	Susan J. Rourke
Owner and Manager	Owner and Manager	President and Owner
Brothers Precision Tool Co.	Franklin Lee Farm	U.S. Land Management Co.
Henry E. Farmer, Sr.	W. Chester Lowder	Donald P. Scarborough
President and Owner	Director of Livestock Program	President and Owner
Henry E. Farmer, Inc.	Public Policy Division	Plank Road Realty, Inc.
	NC Farm Bureau Federation, Inc.
Charles F. Geschickter, III	John P. Murray, MD	John W. Shealy, Jr.
President and Chief Executive Officer	Board Vice Chairman	President
ST Motorsports, Inc.;	Retired – Physician and Owner	Capital Concrete Co.
JTG Racing, Inc. and	Albemarle Ear, Nose and Throat
Wood / JTG Racing, Inc.
Thomas M. Hearne, Jr.	James E. Nance	Michael E. Snyder, Sr.
Geopavement Engineer	President	Board Chairman
NC Department of Transportation	Confederate Motors, Inc.	Vice President
		EJS and Sons, LLC
Charles D. Horne	Emmett S. Patterson	Douglas L. Stafford
President	Retired – General Manager and Executive Vice President	Principal
Hornwood, Inc.	Pee Dee Electric Membership Corporation	Griffin Stafford, LLC
Joseph R. Kluttz, Jr.	Timothy J. Propst	Emily M. Thomas
President	Executive Vice President	Vice President - Administration and Finance
Albemarle Insurance Agency, Inc.	Propst Construction Co., Inc.	CMH Flooring Products, Inc.
Executive Officers
Roger L. Dick	W.D. “Bill” Lawhon, Jr.	Jimmy L. Strayhorn
President and Chief Executive Officer	President and Chief Executive Officer	President and Chief Executive Officer
Uwharrie Capital Corp	Bank of Stanly	Anson Bank & Trust Co.
Brendan P. Duffey	Christy D. Stoner	Jeffrey M. Talley
Executive Vice President and Chief Operating Officer	President and Chief Executive Officer The Strategic Alliance Corporation, BOS Agency, Inc. Chief Executive Officer Strategic Investment Advisors, Inc. Executive Vice President Marketing Uwharrie Capital Corp	President
Uwharrie Capital Corp		Strategic Investment
		Advisors, Inc.
Patricia K. Horton
Chief Executive Officer		Barbara S. Williams
Cabarrus Bank & Trust		Executive Vice President and
Company		Controller
		Uwharrie Capital Corp

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