10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2011

OR

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

For the transition period from            to            .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $1.25 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    x

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

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $27,917,811.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 7,593,929 shares of common stock outstanding as of March 19, 2012.

Documents Incorporated by Reference.

Portions of the Registrant’s 2011 Annual Report to Shareholders are incorporated by reference into Part II of this report. Portions of the Registrant’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

FORM 10-K CROSS REFERENCE INDEX

As indicated below, portions of (i) the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2011 and (ii) the Registrant’s Proxy Statement for the 2012 Annual Meeting of Shareholders as filed with the Securities and Exchange Commission via EDGAR are incorporated by reference into Parts II and III of this report.

Key
AR	Annual Report to Shareholders for the fiscal year ended December 31, 2011
Proxy	Proxy Statement for the 2012 Annual Meeting of Shareholders
10-K	This annual report on Form 10-K for the fiscal year ended December 31, 2011

		Document
Part I
Item 1.	Business	10-K
Item 1A.	Risk Factors	10-K
Item 1B.	Unresolved Staff Comments	10-K
Item 2.	Properties	10-K
Item 3.	Legal Proceedings	10-K
Item 4.	Mine Safety Disclosures	10-K
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10-K
Item 6.	Selected Financial Data	AR
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	AR
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	10-K
Item 8.	Financial Statements and Supplementary Data	AR
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	10-K
Item 9A.	Controls and Procedures	10-K
Item 9B.	Other Information	10-K
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	Proxy
Item 11.	Executive Compensation	Proxy
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	Proxy
Item 13.	Certain Relationships and Related Transactions, and Director Independence	Proxy
Item 14.	Principal Accountant Fees and Services	Proxy
Part IV
Item 15.	Exhibits and Financial Statement Schedules	10-K

PART I

Item 1. Business

Uwharrie Capital Corp (the “Company”) is a North Carolina business corporation and registered 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 (“Strategic Alliance”), BOS Agency, Inc. (“BOS Agency”) and Gateway Mortgage, Inc. (“Gateway”), a mortgage brokerage company acquired in August 2000. The Company also owns two non-bank subsidiaries, Strategic Investment Advisors, Inc. formed in 1999 and Uwharrie Mortgage, Inc. formed in 2004.

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 the Company. The savings bank operates under the name Anson Bank & Trust Co. (“Anson”).

During 2002, the Company expanded its service area into the Cabarrus County market with two banking offices of Stanly. On April 10, 2003 the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus” and together with Stanly and Anson, the “Banks”). As of that date, Cabarrus purchased the two branch offices of Stanly located in Cabarrus County in order to commence operations.

The Company and its subsidiaries are located in Stanly County, Anson County and Cabarrus County, North Carolina. The Company is community oriented, emphasizing the well-being of the people in its region above financial gain in directing its corporate decisions. In order to best serve its communities, the Company believes it must remain a strong, viable, independent financial institution. This means that the Company must evolve with today’s quickly changing financial services industry. In 1993, the Company implemented its current strategy to remain a strong, independent community financial institution that is competitive with larger institutions and allows its service area to enjoy the benefits of a local financial institution and the strength its capital investment provides the community. This strategy consists of developing and expanding the Company’s technological capabilities while recruiting and maintaining a workforce sensitive to the financial services needs of its customers. This strategy has provided the Company with the capacity to grow and leverage the high cost of delivering competitive services.

At December 31, 2011 the Company and related subsidiaries had 162 full-time and 26 part-time employees.

Business of the Banks

Stanly is a North Carolina chartered commercial bank, which was incorporated in 1983 and which commenced banking operations on January 26, 1984. Its main banking office is located at 167 North Second Street, Albemarle, North Carolina, and it operates five other banking offices located in Stanly County, North Carolina. Stanly is the only commercial bank headquartered in Stanly County.

Its operations are primarily retail oriented and directed to individuals and small to medium-sized businesses located in its market area, and its deposits and loans are derived primarily from customers in its geographical market. Stanly provides traditional commercial and consumer banking services, including personal and commercial checking and savings accounts, money market accounts, certificates of deposit, individual retirement accounts, and related business and individual banking services. Stanly’s lending activities include commercial loans and various consumer-type loans to individuals, including installment loans, mortgage loans, equity lines of credit and overdraft checking credit. Stanly also offers internet and mobile banking, 24-

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hour telephone banking, and issues Visa® check cards, an electronic banking card, which functions as a point-of-sale card and allows its customers to access their deposit accounts at five branches of Stanly and at most automated teller machines of other banks linked to the STAR® or CIRRUS® networks. Stanly is licensed to offer MasterCard® credit cards. Stanly does not provide the services of a trust department.

Anson, acquired by the Company on January 19, 2000, was originally chartered in 1889 as Anson Building and Loan Association, a North Carolina chartered mutual savings institution. Later changed to Anson Savings Bank, it was converted to a stock-chartered institution in June 1998. As a subsidiary of the Company, Anson provides the same level of financial services to the Anson County market as those of Stanly described above. Its main office and banking location is 211 South Greene Street in Wadesboro, North Carolina.

Cabarrus, which opened on April 10, 2003, is a full-service commercial bank located in Cabarrus County. Its main office is located at 25 Palaside Drive, NE in Concord, North Carolina and it operates another branch in Mt. Pleasant, North Carolina. As a subsidiary of the Company, Cabarrus provides the same level of financial services as the Company’s other banking subsidiaries.

Non-bank Subsidiaries

Stanly has three wholly-owned subsidiaries, BOS Agency, Strategic Alliance and Gateway. BOS Agency was formed during 1987 and engages in the sale of various insurance products, including annuities, life insurance, long-term care, disability insurance and Medicare supplements. Strategic Alliance was formed during 1989 as BOS Financial Corporation and, during 1993, adopted its current name. It is registered with the Securities and Exchange Commission and licensed by the Financial Industry Regulatory Authority (“FINRA”) as a securities broker-dealer. Gateway is a mortgage brokerage company, acquired by Stanly in 2000.

The Company has two non-bank subsidiaries. Strategic Investment Advisors Inc., which is registered as an investment advisor with the Securities and Exchange Commission, began operations on April 1, 1999 and provides portfolio management services to customers in the Uwharrie Lakes Region. On April 7, 2004, the Company established Uwharrie Mortgage, Inc., a subsidiary to serve in the capacity of trustee and substitute trustee under deeds of trust.

Competition

Commercial banking in North Carolina is extremely competitive, due in large part to early adoption of statewide and interstate branching laws. The Company encounters significant competition from a number of sources, including other bank holding companies, commercial banks, thrift and savings and loan institutions, credit unions, and other financial institutions and financial intermediaries.

Among commercial banks, Stanly, Anson and Cabarrus compete in their market areas with some of the largest banking organizations in the state, several of which have hundreds of branches in North Carolina and billions of dollars in assets. Moreover, competition is not limited to financial institutions based in North Carolina. The enactment of federal legislation authorizing nationwide interstate banking has greatly increased the size and financial resources of some of the Company’s competitors. Consequently, some competitors have substantially higher lending limits due to their greater total capitalization, and may perform functions for their customers that the Company currently does not offer. As a result, the Company could encounter increased competition in the future that may limit its ability to maintain or increase its market share or otherwise materially and adversely affect its business, results of operations and financial condition.

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Each of the Banks depends on its reputation as a community bank in its local market, direct customer contact, its ability to make credit and other business decisions locally, and personalized service to counter these competitive disadvantages.

Exposure to Local Economic Conditions

The Company’s success is dependent to a significant extent upon economic conditions in Stanly, Anson and Cabarrus Counties, and more generally, in the Uwharrie Lakes Region. In addition, the banking industry in general is affected by economic conditions such as inflation, recession, unemployment and other factors beyond the Company’s control. Economic recession over a prolonged period or other economic dislocation in Stanly, Anson and Cabarrus Counties and the Uwharrie Lakes Region could cause increases in non-performing assets and impair the values of real estate collateral, thereby causing operating losses, diminishing liquidity and erosion of capital. Although management believes its loan policy and review process results in sound and consistent credit decisions on its loans, there can be no assurance that future adverse changes in the economy in the Company’s market area would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Impact of Technological Advances; Upgrade to Company’s Infrastructure

The banking industry is undergoing, and management believes it will continue to undergo, technological changes with frequent introductions of new technology-driven products and services, such as internet banking. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as enhance efficiencies in the Company’s operations. Management believes that keeping pace with technological advances is critical for the Company in light of its strategy to continue its sustained pace of growth. As a result, the Company intends to continue to upgrade its internal systems, both through the efficient use of technology (including software applications) and by strengthening its policies and procedures. At the same time, the Company anticipates that it will expand its array of technology-based products to its customers.

Regulation of the Company

Federal Regulation. The Company is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, (the “BHC Act”), as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.

The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.

The merger or consolidation of the Company with another bank holding company, or the acquisition by the Company of the stock or assets of another bank, or the assumption of liability by the Company to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. This decision is based upon a consideration of statutory factors similar to those outlined above with respect to the BHC Act. In addition, in certain such cases an

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application to, and the prior approval of, the Federal Reserve Board under the BHC Act and/or the North Carolina Banking Commission may be required.

The Company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” and “well managed” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company examination by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.

The status of the Company as a registered bank holding company under the BHC Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

In addition, a bank holding company is prohibited generally from engaging in non-banking activities, or acquiring five percent or more of any class of voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:

• making or servicing loans;

• performing certain data processing services;

• providing discount brokerage services;

• acting as fiduciary, investment or financial advisor;

• leasing personal or real property;

• making investments in corporations or projects designed primarily to promote community welfare; and

• acquiring a savings and loan association.

In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.

However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”), which became effective on March 11, 2000, the types of activities in which bank holding companies may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending

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activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.

A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities.

Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators, and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions. The Company has not elected to become a financial holding company.

Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:

• a leverage capital requirement expressed as a percentage of total assets;

• a risk-based requirement expressed as a percentage of total risk-weighted assets; and

• a Tier 1 leverage requirement expressed as a percentage of total assets.

The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.

Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of strength for their depository institution subsidiaries, and if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.

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The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994 (the “Riegle Act”), to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.

In addition, in September 1996 the agencies adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law is applicable to the extent that the Company maintains depository institutions as separate subsidiaries.

Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Banks, the Company, any subsidiary of the Company and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment. This priority would also apply to guarantees of capital plans under FDICIA.

Recent Regulatory Initiatives. Beginning in late 2008 and continuing into 2009, the federal government took sweeping actions in response to the deepening economic recession. President Bush signed the Emergency Economic Stabilization Act of 2008 or “EESA” into law on October 3, 2008. Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program (“TARP”) for the purpose of stabilizing the U.S. financial markets. On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program. The Capital Purchase Program was designed to invest up to $250 billion (later increased to $350 billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate. In connection with its

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investment in senior preferred stock, the Treasury also received ten-year warrants to purchase common shares of participating institutions.

The Company applied and was approved for participation in the Capital Purchase Program in late 2008. On December 23, 2008, the Company issued and sold to the Treasury 10,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred”), for a purchase price of $10,000,000. The Company also issued a warrant to the Treasury that was immediately exercised for 500.005 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Warrant Preferred”). Both the Senior Preferred and the Warrant Preferred qualify as Tier 1 capital.

As a result of its participation in the Capital Purchase Program, the Company has become subject to a number of regulations and restrictions. The ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration shares of its common stock is subject to restrictions. The Company is also required to have in place certain limitations on the compensation of its senior executive officers.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. This law includes additional restrictions on executive compensation applicable to the Company as a participant in the TARP Capital Purchase Program.

For additional information about this transaction and the Company’s participation in the Capital Purchase Program, please see Note 14 to the Company’s audited consolidated financial statements included with the annual report to shareholders and the Company’s report on Form 8-K filed with the Securities and Exchange Commission on December 26, 2008.

Regulation of the Banks

General. The Banks are subject to supervision, examination and regulation by the North Carolina Office of the Commissioner of Banks (“Commissioner”) and the FDIC and to North Carolina and federal statutory and regulatory provisions governing such matters as capital standards, mergers, subsidiary investments and establishment of branch offices. The FDIC also has the authority to conduct special examinations. The Banks are required to file reports with the Commissioner and the FDIC concerning their respective activities and financial condition and are also required to obtain regulatory approval prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

As federally insured depository institutions, the Banks are subject to various regulations promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”), including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).

The system of regulation and supervision applicable to the Banks establishes a comprehensive framework for their operations, and is intended primarily for the protection of the FDIC and depositors, rather than shareholders. Changes in the regulatory framework could have a material effect on the Banks that in turn, could have a material effect on the Company. Certain of the legal and regulatory requirements are applicable to the Banks and Company. This discussion does not purport to be a complete explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.

State Law. The Banks are subject to extensive supervision and regulation by the Commissioner. The Commissioner oversees state laws that set specific requirements for capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North

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Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Banks are required to make regular reports to the Commissioner describing in detail their resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

• the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;

• the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

• the establishment of strengthened capital and prudential standards for banks and bank holding companies;

• enhanced regulation of financial markets, including derivatives and securitization markets;

• the elimination of certain trading activities by banks;

• a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

• amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

• new disclosure and other requirements relating to executive compensation and corporate governance.

The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). The Federal Reserve released a final rule on February 9, 2011 (effective on April 1, 2011) which requires a “banking entity,” a term that is defined to include bank holding companies like the Registrant, to bring its proprietary trading activities and investments into compliance with the Dodd-Frank Act restrictions no later than two years after the earlier of: (1) July 21, 2012, or (2) 12 months after the date on which interagency final rules are adopted. Pursuant to the compliance date final rule, banking entities are permitted to request an extension of this timeframe from the Federal Reserve. On October 11, 2011, the federal banking agencies released for comment proposed regulations implementing the Volcker Rule. The public comment period closed on February 13, 2012. The proposal has been criticized and there is no consensus as to what the provisions will ultimately include. The Registrant will be reviewing the implications of the interagency rules on its investments once those rules are issued and will plan for any adjustments of its activities or its holdings in order to be in compliance by the announced compliance date.

A number of other provisions under Dodd-Frank remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact our business. However, we believe that certain aspects of the legislation, including, without limitation, the additional cost

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of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.

Deposit Insurance. The Banks’ deposits are insured up to limits set by the Deposit Insurance Fund (“DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio” or “DRR”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the DRR at 2.0%.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.

The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation was effective April 1, 2011.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in non-interest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Banks elected to opt out of the Debt Guarantee Program. The Banks elected to participate in the TAG Program and as a result, a material increase in deposit insurance premiums is not currently anticipated. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010. It was subsequently extended again through December 31, 2010. The Banks elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit

12

accounts. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010. This change is expected to lower the Banks’ FDIC insurance expense.

On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments were designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. The FDIC projected that if no action were taken, its liquidity needs to resolve failures would have exceeded its liquid assets beginning in the first quarter of 2010. The prepaid assessment for all insured institutions was collected on December 30, 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessment was based on an institution’s total base assessment rate in effect on September 30, 2009. That rate was increased by 3 basis points for the 2011 and 2012 prepayments and a quarterly five percent deposit growth rate is also built into the calculation.

On December 30, 2009, the Banks paid an aggregate $2.1 million in prepaid assessments which are accounted for as a prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the Banks have expensed their regular quarterly assessments and recorded an offsetting credit to the prepaid assessment asset, which they will continue to do until the asset is exhausted. If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned.

The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and the Banks. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Banks is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.

Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements

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and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2011, Stanly was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 12.07% and 13.33% respectively. As of December 31, 2011, Anson was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 15.73% and 17.00% respectively. As of December 31, 2011 Cabarrus was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 13.06% and 14.32% respectively.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk (“IRR”) exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s IRR management include a measurement of board of directors and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures provided under FDICIA described below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.

FDICIA. In December 1991, Congress enacted FDICIA, which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. FDICIA provides for, among other things:

• publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants;

• the establishment of uniform accounting standards by federal banking agencies;

• the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital;

• additional grounds for the appointment of a conservator or receiver; and

• restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.

FDICIA also provides for increased funding of the FDIC insurance fund and the implementation of risk-based premiums.

A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution

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may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions. This act has not had a material impact on our operations.

Check 21. On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21. This law gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major provisions include:

• allowing check truncation without making it mandatory;

• demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

• legalizing substitutions for and replacements of paper checks without agreement from consumers;

• retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

• requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

• requiring re-crediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

Community Reinvestment Act. The Banks are subject to the provisions of the Community Reinvestment Act of 1977, as amended (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with the examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. The regulatory agency’s assessments of the Banks’ records are made available to the public. Such an assessment is required of any bank that has applied for any application for a domestic deposit-taking branch, relocation of a main office, branch or ATM, merger or consolidation with or acquisition of assets or assumption of liabilities of a federally insured depository institution.

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Under CRA regulations, banks with assets of less than $1 billion are subject to streamlined small bank performance standards and much less stringent data collection and reporting requirements than larger banks. The agencies emphasize that small banks are not exempt from CRA requirements. The streamlined performance method for small banks focuses on the bank’s loan-to-deposit ratio, adjusted for seasonal variations and as appropriate, other lending-related activities, such as loan originations for sale to secondary markets or community development lending or qualified investments; the percentage of loans and, as appropriate, other lending-related activities located in the Banks’ assessment areas; the Banks’ record of lending to and, as appropriate, other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of the Banks’ loans given its assessment areas, capacity to lend, local economic conditions, and lending opportunities; and the Banks’ record of taking action, if warranted, in response to written complaints about its performance in meeting the credit needs of its assessment areas.

Regulatory agencies will assign a composite rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance” to the institution using the foregoing ground rules. A bank’s performance need not fit each aspect of a particular rating profile in order for the bank to receive that rating; exceptionally strong performance with respect to some aspects may compensate for weak performance in others, and the bank’s overall performance must be consistent with safe and sound banking practices and generally with the appropriate rating profile. To earn an outstanding rating, the bank first must exceed some or all of the standards mentioned above. The agencies may assign a “needs to improve” or “substantial noncompliance” rating depending on the degree to which the bank has failed to meet the standards mentioned above.

The regulation further states that the agencies will take into consideration these CRA ratings when considering any application and that a bank’s record of performance may be the basis for denying or conditioning the approval of an application.

Limits on Loans to One Borrower. Federal regulations and North Carolina law impose restrictions on the size of loans that may be made to any one borrower, including related entities. Under applicable law, with certain limited exceptions, loans and extensions of credit by a state chartered bank to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15% of the unimpaired capital of a bank. Loans and extensions of credit fully secured by readily marketable collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 10% of the unimpaired capital fund of a bank.

Transactions with Related Parties. Transactions between the Banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. In a holding company context, the parent holding company of a bank and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.

Loans to Directors, Executive Officers and Principal Stockholders. The Banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the applicable regulations thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a bank and certain affiliated interests of such persons, may not exceed, together with all other

16

outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% stockholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.

The Banks also are subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended (“BHCA”) prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

Additionally, North Carolina statutes set forth restrictions on loans to executive officers of state chartered banks, which provide that no bank may extend credit to any of its executive officers nor a firm or partnership of which such executive officers is a member, nor a company in which such executive officer owns a controlling interest, unless the extension of credit is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with persons who are not employed by the bank, and provided further that the extension of credit does not involve more than the normal risk of repayment.

Miscellaneous. The dividends that may be paid by the Banks are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid unless the Banks’ capital surplus is at least 50% of its paid-in capital.

The earnings of the Banks will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Banks.

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Change of Control

State and federal law restricts the amount of voting stock of a bank holding company or a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company or bank by tender offer or similar means than it might be to acquire control of another type of corporation.

Pursuant to North Carolina law, no person may, directly or indirectly, purchase or acquire voting stock of any bank holding company or bank which would result in the change of control of that entity unless the Commissioner first shall have approved such proposed acquisition. A person will be deemed to have acquired “control” of the bank holding company or the bank if he, she or it, directly or indirectly, (i) owns, controls or has the power to vote 10% or more of the voting stock of the bank holding company or bank, or (ii) possesses the power to direct or cause the direction of its management and policy.

Federal law imposes additional restrictions on acquisitions of stock in bank holding companies and FDIC-insured banks. Under the federal Change in Bank Control Act and the regulations there under, a person or group acting in concert must give advance notice to the Federal Reserve Board or the FDIC before directly or indirectly acquiring the power to direct the management or policies of, or to vote 25% or more of any class of voting securities of, any bank holding company or federally-insured bank. Upon receipt of such notice, the federal regulator either may approve or disapprove the acquisition. The Change in Bank Control Act generally creates a rebuttable presumption of a change in control if a person or group acquires ownership or control of or the power to vote 10% or more of any class of a bank holding company or bank’s voting securities; the bank holding company has a class of securities that are subject to registration under the Securities Exchange Act of 1934; and, following such transaction, no other person owns a greater percentage of that class of securities.

Government Monetary Policy and Economic Controls

As a bank holding company whose primary asset is the ownership of the capital stock of two commercial banks and a savings bank, the Company is directly affected by the government’s monetary policy and the economy in general. The actions and policies of the Federal Reserve Board, which acts as the nation’s central bank, can directly affect the money supply and, in general, affect a bank’s lending activities by increasing or decreasing their costs and availability of funds. An important function of the Federal Reserve Board is to regulate the national supply of bank credit in order to combat recession and curb inflation pressures. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate and surcharge, if any, on member bank borrowings, and changes in reserve requirements against bank deposits.

The Banks are members of the Federal Reserve System and are subject to reserve requirements imposed by the Federal Reserve Board on member banks. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future.

Incentive Compensation Policies and Restrictions

In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking

18

organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant and the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.

Future Legislation

The Company cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Company’s operations.

Item 1A. Risk Factors

Item not required for smaller reporting companies.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company’s executive office is located at 132 North First Street, Albemarle, North Carolina, where the Company owns a three-building complex located at 130-134 North First Street in Albemarle. This complex houses the Company’s offices and meeting rooms and is also the location of Stanly’s subsidiary, Strategic Alliance.

Stanly’s Main Office is located at 167 North Second Street, Albemarle, North Carolina. A portion of the Main Office facility leased since it opened in 1984 was purchased in 2009. Its administrative and executive offices occupy an adjoining building, purchased in 1991. Stanly owns a commercial building which houses some of its operation offices and parking lot adjacent to its Main Office. Stanly also acquired a commercial building in downtown Albemarle in December 2001 that is held for future expansion. Stanly acquired a lot in Montgomery County in 2003 that is held as a potential ATM site. During 2009 Stanly acquired property in downtown Albemarle for future expansion.

Stanly owns its other banking locations at 710 North First Street, which houses the Village Branch, and its East Albemarle Branch at 800 Highway 24-27 Bypass, both located in Albemarle. It also owns a branch office located at 107 South Main Street in Norwood, North Carolina, a branch office located at 624 North Main Street in Oakboro, North Carolina and a branch located at 416 West Main Street in Locust, North Carolina. Stanly acquired property in Richfield, North Carolina for future expansion.

All of Stanly’s existing offices are freestanding, fully equipped and have adequate parking and drive-up banking facilities, with the exception of the Main Office in Albemarle which does not have a drive-up facility.

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Cabarrus owns full service branch offices located at 25 Palaside Drive, N.E., Concord, North Carolina and at 1490 South Main Street, Mt. Pleasant, North Carolina and also owns some property adjacent to the Mt. Pleasant banking office located at 1480 South Main Street. Cabarrus leases a suite at 700 North Church Street in Concord, North Carolina where it previously provided banking services and which currently serves as an administrative and lending office. Cabarrus acquired a lot in Cabarrus county for future branch expansion.

Anson owns its banking facility located at 211 South Greene Street, Wadesboro, North Carolina and also owns an ATM site at 426 East Caswell Street, Wadesboro, North Carolina. Anson purchased a lot in 2006 for a future branch location.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

None.

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 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 adopts a dividend policy on an annual basis. No cash dividends on the Company’s common stock were declared or paid during 2011 or 2010 and it is not currently anticipated that cash dividends on the Company’s common stock will be declared or paid during 2012.

As of December 31, 2011, there were 3,468 Shareholders of the Company’s common stock.

Additional information regarding the market for the Company’s stock is incorporated by reference to the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2011 on page 34. See Item 12 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.

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

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the Capital Purchase Program (“CPP”), the Company must

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obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or otherwise or to pay a cash dividend.

Item 6. Selected Financial Data

Incorporated by reference to the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2011.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Incorporated by reference to the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2011.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item not required for smaller reporting companies.

Item 8. Financial Statements and Supplementary Data

Incorporated by reference to the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2011.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

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

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in

21

accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the Company’s internal control over financial reporting as of December 31, 2011. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:

Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, we believe that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.

Date: March 20, 2012	/s/ Roger L. Dick
	Roger L. Dick
	Chief Executive Officer
Date: March 20, 2012	/s/ Robert O. Bratton
	Robert O. Bratton
	Principal Financial Officer

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to applicable Securities and Exchange Commission rules.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2011. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the fourth quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Incorporated by reference to pages 6-23 of the Company’s definitive proxy statement for the 2012 Annual Meeting of Shareholders.

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The Company has adopted a Code of Ethics that applies, among others, to its Principal Executive Officer and Principal Financial Officer. The Company’s Code of Ethics is available at www.uwharrie.com.

Item 11. Executive Compensation

Incorporated by reference to pages 23-30 of the Company’s definitive proxy statement for the 2012 Annual Meeting of Shareholders.

Item 12. Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters

Incorporated by reference to pages 3-6 of the Company’s definitive proxy statement for the 2012 Annual Meeting of Shareholders.

The following table sets forth certain equity compensation plan information at December 31, 2011.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining  available for future issuance under equity compensation plans (excluding securities reflected in column(a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		123,570	$	5.16		258,205
Equity compensation plans not approved by security holders		N/A		N/A		N/A
Total		123,570	$	5.16		258,205

A description of the Company’s equity compensation plans is presented in Note 16 to the Company’s consolidated financial statements incorporated by reference into Item 8 of this report.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference to pages 19 and 30 of the Company’s definitive proxy statement for the 2012 Annual Meeting of Shareholders.

Item 14. Principal Accountant Fees and Services

Incorporated by reference to pages 32 of the Company’s definitive proxy statement for the 2012 Annual Meeting of Shareholders.

23

PART IV

Item 15. Exhibits, Financial Statement Schedules

The following documents are filed as part of this report:

1. Financial statements from the Registrant’s Annual Report to stockholders for the fiscal year ended December 31, 2011, which are incorporated herein by reference:

Consolidated Balance Sheets as of December 31, 2011 and 2010.

Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009.

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009.

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009.

Notes to Consolidated Financial Statements.

Report of independent registered public accounting firm.

2. Financial statement schedules required to be filed by Item 8 of this Form:

None

3. Exhibits

24

Exhibit Number	Description of Exhibit
3(a)	Registrant’s Articles of Incorporation *
3(b)	Registrant’s By-laws *
3(c)	Articles of Amendment dated December 19, 2008 regarding Series A and Series B Preferred Stock*****
4(a)	Form of stock certificate*
4(b)	Form of certificate for the Series A Preferred stock*****
4(c)	Form of certificate for the Series B Preferred stock*****
4(d)	Warrant dated December 23, 2008 for purchase of share of Series B Preferred stock*****
4(e)	Form of Security Holders Agreement ********
10(a)	Incentive Stock Option Plan, as amended, a compensatory plan *
10(b)	Employee Stock Ownership Plan and Trust, a compensatory plan**
10(c)	2006 Incentive Stock Option Plan, a compensatory plan ***
10(d)	2006 Employee Stock Purchase Plan, a compensatory plan ***
10(e)	Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury*****
10(f)	Relocation Assistance Agreement dated February 9, 2009 between the Registrant and Brendan P. Duffey ******
10(g)	Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008 between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner and Jimmy L. Strayhorn ******
13	2011 Annual Report to Shareholders (filed herewith)
21	Subsidiaries of the Registrant (filed herewith)
23	Consent of Dixon Hughes Goodman LLP (filed herewith)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

25

99(a)	Registrant’s definitive proxy statement for the 2012 Annual Meeting of Shareholders****
99(b)	Certificate pursuant to Emergency Economic Stabilization Act of 2008, as amended (filed herewith)
99(c)	Certificate pursuant to Emergency Economic Stabilization Act of 2008, as amended (filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL (eXtensible Business Reporting Language) ******

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

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

*** Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

**** Filed with the Commission pursuant to Rule 14a-6 (b).

***** Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.

****** Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended 2009.

******* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

******** Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	UWHARRIE CAPITAL CORP
March 20, 2012	By:	/s/ Roger L. Dick
		Roger L. Dick, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Roger L. Dick	March 20, 2012
Roger L. Dick
Chief Executive Officer
/s/ Robert O. Bratton	March 20, 2012
Robert O. Bratton, Principal Financial Officer
/s/ W. Stephen Aldridge, III	March 20, 2012
W. Stephen Aldridge, III, Director
/s/ Joe S. Brooks	March 20, 2012
Joe S. Brooks, Director
/s/ Ronald T. Burleson	March 20, 2012
Ronald T. Burleson, Director
/s/ Bill C. Burnside, DDS	March 20, 2012
Bill C. Burnside, DDS, Director
/s/ Charles F. Geschickter, III	March 20, 2012
Charles F. Geschickter, III, Director
/s/ Thomas M. Hearne, Jr.	March 20, 2012
Thomas M. Hearne, Jr., Director
/s/ Charles D. Horne	March 20, 2012
Charles D. Horne, Director
/s/ W. Kenneth Huntley	March 20, 2012
W. Kenneth Huntley, Director
/s/ Joseph R. Kluttz, Jr.	March 20, 2012
Joseph R. Kluttz, Jr., Director
/s/ Lee Roy Lookabill, Jr.	March 20, 2012
Lee Roy Lookabill, Jr., Director

27

/s/ W. Chester Lowder	March 20, 2012
W. Chester Lowder, Director
/s/ Barry S. Moose	March 20, 2012
Barry S. Moose, Director
	March 20, 2012
Cynthia L. Mynatt, Director
/s/ Timothy J. Propst	March 20, 2012
Timothy J. Propst, Director
/s/ Susan J. Rourke	March 20, 2012
Susan J. Rourke, Director
/s/ Donald P. Scarborough	March 20, 2012
Donald P. Scarborough, Director
/s/ S. Todd Swaringen	March 20, 2012
S. Todd Swaringen, Director
	March 20, 2012
Edward B. Tyson, Director

28

UWHARRIE CAPITAL CORP

Exhibit Index

Exhibit Number	Description
3(a)	Registrant’s Articles of Incorporation *
3(b)	Registrant’s By-laws *
3(c)	Articles of Amendment dated December 19, 2008 regarding Series A and Series B Preferred Stock*****
4(a)	Form of stock certificate*
4(b)	Form of certificate for the Series A Preferred stock*****
4(c)	Form of certificate for the Series B Preferred stock*****
4(d)	Warrant dated December 23, 2008 for purchase of share of Series B Preferred stock*****
4(e)	Form of Security Holders Agreement ********
10(a)	Incentive Stock Option Plan, as amended, a compensatory plan *
10(b)	Employee Stock Ownership Plan and Trust, a compensatory plan**
10(c)	2006 Incentive Stock Option Plan, a compensatory plan ***
10(d)	2006 Employee Stock Purchase Plan, a compensatory plan ***
10(e)	Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury*****
10(f)	Relocation Assistance Agreement dated February 9, 2009 between the Registrant and Brendan P. Duffey ******
10(g)	Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008 between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner and Jimmy L. Strayhorn ******
13	2011 Annual Report to Shareholders (filed herewith)
21	Subsidiaries of the Registrant (filed herewith)
23	Consent of Dixon Hughes Goodman LLP (filed herewith)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

29

32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
99(a)	Registrant’s definitive proxy statement for the 2012 Annual Meeting of Shareholders****
99(b)	Certificate pursuant to Emergency Economic Stabilization Act of 2008, as amended (filed herewith)
99(c)	Certificate pursuant to Emergency Economic Stabilization Act of 2008, as amended (filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL (eXtensible Business Reporting Language) ******

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

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

*** Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

**** Filed with the Commission pursuant to Rule 14a-6 (b).

***** Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.

****** Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended 2009.

******* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

******** Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

30

EX-13

Exhibit 13

Uwharrie Capital Corp

2011

ANNUAL REPORT TO SHAREHOLDERS

31

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32

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

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

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

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

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

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

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

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

Strategic Investment Group: Securities and insurance products are offered through Private Client Services, LLC, 2225 Lexington Rd , Louisville, KY 40206, ph: 502-451-0600, Member FINRA and SPIC. Private Client Services, LLC and Uwharrie Capital Corp along with its affiliates and/or subsidiaries are separate, distinct, and unaffiliated entities. It is important to note that securities and insurance products are; NOT BANK DEPOSITS – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT OBLIGATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.

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.

33

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

(Dollars in thousands, except per share amounts)	2011			2010			Percent Increase (Decrease)
For the year:
Net income	$	900		$	713			26.23	%
Net income available to common shareholders	$	255		$	68			275.00	%
Basic net income per common share	$	0.03		$	0.01			200.00	%
Diluted net income per common share	$	0.03		$	0.01			200.00	%
Weighted average common shares outstanding (diluted)		7,467,396			7,485,373			(0.24	)%
At year-end:
Total assets	$	526,902		$	535,426			(1.59	)%
Total earning assets		478,494			499,126			(4.13	)%
Loans held for investment		366,675			387,769			(5.44	)%
Total interest-bearing liabilities		415,023			433,739			(4.32	)%
Shareholders’ equity		45,603			43,493			4.85	%
Book value per common share	$	4.65		$	4.38			6.16	%
Averages for the year:
Total assets	$	529,970		$	514,425			3.02	%
Total earning assets		486,550			473,306			2.80	%
Loans held for investment		381,419			375,381			1.61	%
Total interest-bearing liabilities		423,794			414,373			2.27	%
Shareholders’ equity		44,462			45,425			(2.12	)%
Financial ratios (in percentage):
Return on average assets		0.17	%		0.14	%
Return on average shareholders’ equity		2.02	%		1.57	%
Average equity to average assets		8.39	%		8.83	%
Net interest margin (fully tax equivalent basis)		4.01	%		3.99	%
Allowance as % of loans at year-end		1.86	%		2.34	%
Allowance as % of nonperforming loans		86.68	%		45.03	%
Nonperforming loans to total loans		2.14	%		5.19	%
Nonperforming assets to total assets		3.44	%		4.14	%
Net loan charge-offs (recoveries) to average loans		1.50	%		0.31	%

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

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

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.

The Board of Directors adopts a dividend policy on an annual basis. For 2011 and 2010, Uwharrie Capital Corp did not declare a dividend. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

34

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35

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, 2011 and 2010, 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, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

March 23, 2012

36

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

	2011			2010
	(dollars in thousands)
ASSETS
Cash and due from banks	$	7,487		$	4,948
Interest-earning deposits with banks		21,200			8,676
Securities available for sale, at fair value		88,661			96,395
Loans held for sale		1,958			6,286
Loans:
Loans held for investment		366,675			387,769
Less allowance for loan losses		(6,815	)		(9,067	)
Net loans held for investment		359,860			378,702
Premises and equipment, net		15,076			14,554
Interest receivable		2,084			2,408
Federal Home Loan Bank stock		2,486			3,252
Bank owned life insurance		6,171			5,975
Goodwill		987			987
Other real estate owned		10,258			2,022
Prepaid assets		1,347			2,088
Other assets		9,327			9,133
Total assets	$	526,902		$	535,426
LIABILITIES
Deposits:
Demand noninterest-bearing	$	62,339		$	54,837
Interest checking and money market accounts		185,539			187,493
Savings deposits		39,273			37,624
Time deposits, $100,000 and over		58,274			59,431
Other time deposits		85,913			94,648
Total deposits		431,338			434,033
Short-term borrowed funds		20,791			20,482
Long-term debt		25,233			34,061
Interest payable		301			342
Other liabilities		3,636			3,015
Total liabilities		481,299			491,933
Off balance sheet items, commitments and contingencies (Note 13)
SHAREHOLDERS’ EQUITY
Preferred stock, no par value: 10,000,000 shares authorized;
10,000 shares of series A issued and outstanding		10,000			10,000
500 shares of series B issued and outstanding		500			500
Discount on preferred stock		(200	)		(300	)
Common stock, $1.25 par value: 20,000,000 shares authorized; 7,593,929 shares issued and outstanding		9,492			9,492
Additional paid-in capital		14,010			14,034
Unearned ESOP compensation		(772	)		(692	)
Undivided profits		10,379			10,124
Accumulated other comprehensive income		2,194			335
Total shareholders’ equity		45,603			43,493
Total liabilities and shareholders’ equity	$	526,902		$	535,426

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

37

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	21,609		$	21,616		$	21,246
Investment securities:
US Treasury		742			612			12
US Government agencies and corporations		1,035			1,896			3,106
State and political subdivisions		371			319			632
Interest-earning deposits with banks and federal funds sold		65			44			66
Total interest income		23,822			24,487			25,062
Interest Expense
Interest checking and money market accounts		785			971			838
Savings deposits		286			327			255
Time deposits $100,000 and over		1,106			1,192			1,980
Other time deposits		1,138			1,684			2,836
Short-term borrowed funds		354			693			316
Long-term debt		1,068			1,084			1,472
Total interest expense		4,737			5,951			7,697
Net interest income		19,085			18,536			17,365
Provision for loan losses		3,456			4,919			1,732
Net interest income after provision for loan losses		15,629			13,617			15,633
Noninterest Income
Service charges on deposit accounts		1,837			2,219			2,360
Other service fees and commissions		3,409			2,883			2,273
Gain (loss) on sale of securities		933			1,484			(711	)
Loss on nonmarketable securities		—			—			(172	)
Loss on securities with other-than-temporary impairment		—			—			(1,807	)
Portion of loss recognized in other comprehensive income		—			—			—
Net impairment recognized in income		—			—			(1,807	)
Income from mortgage loan sales		1,806			3,172			3,436
Other income		271			140			445
Total noninterest income		8,256			9,898			5,824
Noninterest Expense
Salaries and employee benefits		12,121			11,648			11,527
Net occupancy expense		1,165			1,193			1,071
Equipment expense		758			769			702
Data processing costs		858			853			792
Office supplies and printing		337			384			335
Foreclosed real estate expense		489			387			219
Professional fees and services		1,488			1,230			968
Marketing and donations		769			1,291			746
Electronic banking expense		875			811			728
Software amortization and maintenance		573			542			470
FDIC insurance		750			795			958
Other noninterest expense		2,606			2,748			2,414
Total noninterest expense		22,789			22,651			20,930
Income before income taxes		1,096			864			527
Income taxes		196			151			(163	)
Net income	$	900		$	713		$	690
Net income	$	900		$	713		$	690
Dividends on preferred stock		(645	)		(645	)		(642	)
Net Income available to common shareholders	$	255		$	68		$	48
Net income per common share
Basic	$	0.03		$	0.01		$	0.01
Diluted	$	0.03		$	0.01		$	0.01
Weighted average common shares outstanding
Basic		7,467,396			7,485,373			7,474,140
Diluted		7,467,396			7,485,373			7,474,140

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

38

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
	(in thousands)
Net Income	$	900		$	713		$	690
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		3,759			390			1,637
Related tax effect		(1,327	)		(156	)		(621	)
Reclassification of losses (gains) recognized in net income		(933	)		(1,484	)		711
Related tax effect		360			572			(274	)
Reclassification of losses for which credit-related portion other-than-temporary impairment was recognized in net income		—			—			1,807
Related tax effect		—			—			(697	)
Total other comprehensive income (loss)		1,859			(678	)		2,563
Comprehensive income	$	2,759		$	35		$	3,253

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

39

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2011, 2010 and 2009

	Number Common Shares Issued		Preferred Stock Series A		Preferred Stock Series B		Discount on Preferred Stock			Common Stock		Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits			Accumulated Other Comprehensive Income(Loss)			Total
	(in thousands, except share data)
Balance, December 31, 2008		7,593,929		10,000		500		(500	)		9,492		14,019			(736	)		10,008			(1,550	)		41,233
Net income		—		—		—		—			—		—			—			690			—			690
Other comprehensive income		—		—		—		—			—		—			—			—			2,563			2,563
Release of ESOP shares		—		—		—		—			—		—			69			—			—			69
Stock compensation expense		—		—		—		—			—		11			—			—			—			11
Record preferred stock dividend and discount accretion		—		—		—		100			—		—			—			(642	)		—			(542	)
Balance, December 31, 2009		7,593,929	$	10,000	$	500	$	(400	)	$	9,492	$	14,030		$	(667	)	$	10,056		$	1,013		$	44,024
Net income		—		—		—		—			—		—			—			713			—			713
Other comprehensive income		—		—		—		—			—		—			—			—			(678	)		(678	)
Release of ESOP shares		—		—		—		—			—		—			75			—			—			75
Increase in ESOP notes receivable		—		—		—		—			—		—			(100	)		—			—			(100	)
Stock compensation expense		—		—		—		—			—		4			—			—			—			4
Record preferred stock dividend and discount accretion		—		—		—		100			—		—			—			(645	)		—			(545	)
Balance, December 31, 2010		7,593,929	$	10,000	$	500	$	(300	)	$	9,492	$	14,034		$	(692	)	$	10,124		$	335		$	43,493
Net income		—		—		—		—			—		—			—			900			—			900
Other comprehensive income		—		—		—		—			—		—			—			—			1,859			1,859
Release of ESOP shares		—		—		—		—			—		(28	)		81			—			—			53
Increase in ESOP notes receivable		—		—		—		—			—		—			(161	)		—			—			(161	)
Stock compensation expense		—		—		—		—			—		4			—			—			—			4
Record preferred stock dividend and discount accretion		—		—		—		100			—		—			—			(645	)		—			(545	)
Balance, December 31, 2011		7,593,929	$	10,000	$	500	$	(200	)	$	9,492	$	14,010		$	(772	)	$	10,379		$	2,194		$	45,603

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

40

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
Cash flows from operating activities
Net income	$	900		$	713		$	690
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		838			815			780
Net amortization of security premiums/discounts		865			412			134
Impairment of securities available for sale		—			—			1,807
Net amortization of mortgage servicing rights		670			869			868
Impairment of foreclosed real estate		212			125			78
Provision for loan losses		3,456			4,919			1,732
Deferred income taxes		1,000			(1,091	)		(737	)
Stock compensation		4			4			11
Net realized (gains)loss on sales / calls available for sale securities		(933	)		(1,484	)		711
Income from mortgage loan sales		(1,806	)		(3,172	)		(3,436	)
Proceeds from sales of loans held for sale		70,251			110,374			144,761
Origination of loans held for sale		(64,116	)		(111,973	)		(142,727	)
(Gain) loss on sale of premises, equipment and other assets		13			71			(1	)
Loss on nonmarketable securities		—			—			172
Increase in cash surrender value of life insurance		(196	)		(261	)		(203	)
Loss on sales of foreclosed real estate		68			332			36
Release of ESOP Shares		53			75			69
Net change in interest receivable		324			(331	)		(50	)
Net change in other assets		(1,910	)		(532	)		(3,652	)
Net change in interest payable		(41	)		(54	)		(106	)
Net change in other liabilities		621			(54	)		714
Net cash provided (used) by operating activities		10,273			(243	)		1,651
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		38,648			53,013			30,353
Purchase of securities available for sale		(28,020	)		(71,430	)		(36,208	)
Net (increase) decrease in loans		6,259			(34,866	)		(15,598	)
Proceeds from sale of premises, equipment and other assets		—			—			1
Purchase of premises and equipment		(1,373	)		(1,725	)		(3,298	)
Proceeds from sales of foreclosed real estate		611			733			1,243
Investment in other assets		(181	)		(240	)		(1,089	)
Net (increase) decrease in Federal Home Loan Bank stock		766			(51	)		(917	)
Net cash provided (used) by investing activities		16,710			(54,566	)		(25,513	)
Cash flows from financing activities
Net increase (decrease) in deposit accounts		(2,695	)		57,259			23,147
Net increase (decrease) in short-term borrowed funds		309			(6,458	)		4,691
Net increase (decrease) in long-term debt		(10,060	)		4,942			(5,859	)
Net proceeds from issuance of junior subordinated debt		1,962			2,476			—
Repayment of junior subordinated debt		(730	)		—			—
Increase in unearned ESOP compensation		(161	)		(100	)		—
Dividend on preferred stock		(545	)		(545	)		(542	)
Net cash provided (used) by financing activities		(11,920	)		57,574			21,437
Increase (decrease) in cash and cash equivalents		15,063			2,765			(2,425	)
Cash and cash equivalents, beginning of year		13,624			10,859			13,284
Cash and cash equivalents, end of year	$	28,687		$	13,624		$	10,859
Supplemental disclosures of cash flow information
Interest paid	$	4,778		$	6,005		$	7,802
Income taxes paid		220			1,274			1,558
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		1,859			(678	)		2,563
Loans transferred to foreclosed real estate		9,127			2,148			1,882
Company financed sales of other real estate owned		—			2,450			—
Mortgage servicing rights capitalized		679			1,113			1,465
Preferred stock dividend accrued		(68	)		(68	)		(68	)

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

41

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies

Nature of Business

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

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

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

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

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

On August 4, 2000, Stanly acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company. This company is currently inactive and does not affect the consolidated financials.

On April 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 Stanly’s subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.

42

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Use of Estimates

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The allowance if any would not have a material impact on the financial statements.

Loans

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

43

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis 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, generally a minimum of six months of sustained performance is required.

Allowance for Loan Losses

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

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

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

Troubled debt restructure loans (TDR) are considered to be impaired loans and are individually evaluated for impairment.

Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment is such a loan is deemed impaired.

44

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

In the third quarter of 2010, the Company upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the new allowance model. The loans that are impaired and included in the specific reserve are excluded from these new calculations.

Mortgage Servicing Rights

The Company capitalizes mortgage 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, and costs related to the improvement of the property are capitalized if the current fair value will allow it, if not these costs are expensed also. 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

45

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.

Restricted Stock

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

Goodwill

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

Stock-Based Compensation

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

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The tax returns for the Company are subject to audit for the 2008 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.

Fair Value of Financial Instruments

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

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

46

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

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

Prices for US Treasury are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the underlying collateral is further impaired below the appraised value the Company records the impaired loan as nonrecurring Level 3.

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

47

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

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.

Mortgage servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

Comprehensive Income

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

As of December 31, 2011 and December 31, 2010, total accumulated other comprehensive income was $2.2 million and $335,000, respectively.

Earnings per Common Share

The Company had stock options outstanding of 123,570, 180,571 and 280,715 at December 31, 2011, 2010 and 2009 respectively. All of these options were anti-dilutive.

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

48

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:

	2011			2010			2009
Weighted average number of common shares used in computing basic net income per common share		7,593,969			7,593,969			7,593,969
Effect of ESOP shares		(126,573	)		(108,596	)		(119,829	)
Adjusted weighted average number of common shares used in computing basic net income per common share		7,467,396			7,485,373			7,474,140
Effect of dilutive stock options		—			—			—
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		7,467,396			7,485,373			7,474,140

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, “Fair Value Measurements.” This update adds a new requirement to disclose transfers in and out of level 1 and level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for level 1 and level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for level 1 and level 2 transfers and the expanded qualitative disclosures, had no impact on the Company’s financial position, results of operations, and EPS. The Company adopted the level 3 disclosure requirements in the first quarter of 2011 and it had no impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued ASU 2010-20, an update to ASC 310 “Receivables”. The update to ASC 310 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s

49

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

financial statements beginning on January 1, 2011. The Company has adopted this update and included the disclosure in the notes to the financial statements.

In April 2011, the FASB issued ASU No. 2011-02, an update to ASC 310 “Receivables”. The update to ASC 310 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS. The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption The adoption of this statement did not have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, “Comprehensive Income.” This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350 “Intangibles - Goodwill and Other.” This update gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

50

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 2010 and 2009 financial statements have been reclassified to conform to the 2011 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

Note 2 - Investment Securities

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

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	32,073	$	1,459	$	—	$	33,532
U.S. Government agencies		19,142		855		—		19,997
GSE - Mortgage-backed securities and CMO’s		24,016		332		85		24,263
State and political subdivisions		10,071		798		—		10,869
Total securities available for sale	$	85,302	$	3,444	$	85	$	88,661
December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	51,622	$	746	$	1,220	$	51,148
U.S. Government agencies		24,862		766		165		25,463
GSE - Mortgage-backed securities and CMO’s		8,655		294		49		8,900
State and political subdivisions		10,725		267		108		10,884
Total securities available for sale	$	95,864	$	2,073	$	1,542	$	96,395

At both December 31, 2011 and 2010, the Company owned Federal Reserve stock reported at cost of $802,850 and 778,850 respectively and is included in other assets. Also at December 31, 2011 and 2010, the Company owned Federal Home Loan Bank Stock (FHLB) of $2.5 million and $3.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks.

Results from sales and calls of securities available for sale for the years ended December 31, 2011, 2010 and 2009 are as follows:

	2011		2010			2009
	(dollars in thousands)
Gross proceeds from sales and calls	$	25,568	$	40,623		$	9,535
Realized gains from sales	$	933	$	1,960		$	219
Realized losses from sales		—		(476	)		(930	)
Net realized gains (losses)	$	933	$	1,484		$	(711	)

51

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

At December 31, 2011, 2010 and 2009 securities available for sale with a carrying amount of $37.7 million, $40.7 million and $11.4 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011 and 2010. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2011, the unrealized losses related to three mortgage backed securities and at December 31, 2010 related to six U.S. Treasury notes, two U.S. Government Agencies, three mortgage backed securities and eight North Carolina municipal bonds.

	Less than 12 Months				12 Months or More				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Gov’t agencies		—		—		—		—		—		—
Mortgage-backed securities and CMO’s		9,734		85		—		—		9,734		85
State and political subdivisions		—		—		—		—		—		—
	$	9,734	$	85	$	—	$	—	$	9,734	$	85
	Less than 12 Months				12 Months or More				Total
December 31, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	26,138	$	1,220	$	—	$	—	$	26,138	$	1,220
U.S. Gov’t agencies		5,736		165		—		—		5,736		165
Mortgage-backed securities and CMO’s		2,900		49		—		—		2,900		49
State and political subdivisions		4,522		108		—		—		4,522		108
	$	39,296	$	1,542	$	—	$	—	$	39,296	$	1,542

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2011, the Company did not intend to sell and was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

52

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

The following table shows contractual maturities of the investment portfolio as of December 31, 2011:

	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within one year	$	2,412	$	2,454
Due after one but within five years		25,559		26,839
Due after five but within ten years		31,711		33,354
Due after ten years		1,604		1,751
Mortgage backed securities		24,016		24,263
	$	85,302	$	88,661

The mortgage-based securities are shown separately as they are not due at a single maturity date.

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

	2011		2010
	(dollars in thousands)
Balance, beginning of the period	$	—	$	1,807
Impairment losses recognized during the year		—		—
Realized losses from sales		—		(1,807	)
Balance, end of year	$	—	$	—

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2011 and 2010 is as follows:

	2011			2010
	(dollars in thousands)
Commercial
Commercial	$	45,907		$	51,679
Real estate - commercial		114,944			105,123
Other real estate construction loans		31,601			52,270
Noncommercial
Real estate 1 - 4 family construction		5,543			4,332
Real estate - residential		101,847			103,781
Home equity		51,413			52,034
Consumer loans		14,710			17,721
Other loans		602			739
		366,567			387,679
Less:
Allowance for loan losses		(6,815	)		(9,067	)
Deferred loan (fees) costs, net		108			90
Loans held for investment, net	$	359,860		$	378,702

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

53

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 - Loans Held for Investment (Continued)

represent 41.81% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that comprise 31.36% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $33.1 million and $43.3 million at December 31, 2011 and 2010, respectively. The nonaccrual status of these loans had the effect of reducing net income by $571,722 in 2011 and $852,599 in 2010. Of the $33.1 million in impaired loans at December 31, 2011, $18.9 million were in the commercial segment and carried allowances totaling $1.1 million while $14.2 million were in the noncommercial segment and carried allowances totaling $1.5 million. The commercial segment had $14.9 million evaluated and required no specific allowance while the noncommercial segment had $8.5 million evaluated and required no specific allowance. Of the $43.3 million in impaired loans at December 31, 2010, $12.5 million were in the commercial segment and carried allowances totaling $3.6 million while $4.4 million were in the noncommercial segment and carried allowances totaling $1.0 million. The commercial segment had $19.5 million evaluated and required no specific allowance while the noncommercial segment had $6.8 million evaluated and required no specific allowance. There were no loans 90 past due and still accruing at December 31, 2011 and $407,223 at December 31, 2010.

Restructured loans at December 31, 2011 totaled $6.0 million of which all $6.0 million are included in the impaired loan total. The carrying value of foreclosed properties held as other real estate was $10.3 million and $2.0 million at December 31, 2011 and 2010, 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, 2011, 2010 and 2009 are presented below:

	2011			2010			2009
	(dollars in thousands)
Balance, beginning of year	$	9,067		$	5,276		$	4,361
Charge-offs		(5,836	)		(1,189	)		(871	)
Recoveries		133			44			54
Other		(5	)		17			—
Provision charged against income		3,456			4,919			1,732
Balance, end of year	$	6,815		$	9,067		$	5,276

54

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The following tables is the breakout of allowance for loss by loan class at December 31, 2011 and 2010:

December 31, 2011

	Beginning Balance		Provisions			Other			Chargeoffs			Recoveries		Ending Balance
			(dollars in thousands)
Commercial	$	966	$	493		$	—		$	(336	)	$	4	$	1,127
Real estate - commercial		2,240		335			—			(1,123	)		7		1,459
Other real estate construction		2,157		1,119			—			(2,958	)		—		318
Real estate construction		33		215			—			(15	)		6		239
Real estate - residential		1,658		697			—			(383	)		11		1,983
Home equity		971		596			—			(631	)		5		941
Consumer loan		984		(27	)		—			(390	)		100		667
Other loans		58		28			(5	)		—			—		81
Total	$	9,067	$	3,456		$	(5	)	$	(5,836	)	$	133	$	6,815

December 31, 2010

	Beginning Balance		Provisions			Other		Chargeoffs			Recoveries		Ending Balance
			(dollars in thousands)
Commercial	$	449	$	569		$	4	$	(59	)	$	3	$	966
Real estate - commercial		1,541		1,216			10		(527	)		—		2,240
Other real estate construction		1,205		952			—		—			—		2,157
Real estate construction		168		(58	)		—		(78	)		1		33
Real estate - residential		1,264		614			—		(222	)		2		1,658
Home equity		213		854			—		(97	)		1		971
Consumer loan		436		714			3		(206	)		37		984
Other loans		—		58			—		—			—		58
Total	$	5,276	$	4,919		$	17	$	(1,189	)	$	44	$	9,067

For the period ending December 31, 2009, the allowance for loan losses totaled $1.205M in the “other real estate construction” category. Approximately 62% of the amount reserved was allotted to one substandard relationship. During the course of 2010, additional provisions were reserved for this relationship as real estate values continued to face downward pressure. In addition, another large relationship was classified as impaired and reserves were allocated for a potential shortfall based on updated appraised value. For the period ending December 31, 2010, these two relationships accounted for 79% of the amount reserved in the allowance for loan losses for the “other real estate construction” category.

In April 2011, the Company moved one of the relationships to foreclosed real estate, and recorded a chargeoff to the allowance in the amount of $1.18M. This charge reduced the overall size of the allowance by approximately 36%. Subsequently, the second relationship was moved to foreclosed real estate, resulting in a further decrease in the allowance. These two relationships represent $2.562M, or 87% of the total amount that was charged off in the “other real estate construction” category for the year ending December 31, 2011. Both of these relationships were external participations on out-of-market properties. These two relationships constituted the largest portion of the Company’s external participations in this loan category, and as a result, management feels it has substantially reduced the overall risk of the portfolio by recognizing a charge to the allowance and moving the properties to foreclosed real estate. The Company also continues to reduce exposure to the “other real estate construction” category, and saw a 40% decline in the overall size of the portfolio during the year.

55

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The following tables shows period-end loans net of charge offs and reserve balances by loan class both individually and collectively evaluated for impairment at December 31, 2011 and 2010:

December 31, 2011

	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
			(dollars in thousands)
Commercial	$	578	$	1,980	$	549	$	43,927	$	1,127	$	45,907
Real estate - commercial		452		12,888		1,007		102,056		1,459		114,944
Other real estate construction		107		4,014		211		27,587		318		31,601
Real estate construction		202		1,095		37		4,448		239		5,543
Real estate - residential		1,001		11,877		982		89,970		1,983		101,847
Home equity		124		993		817		50,420		941		51,413
Consumer loan		119		242		548		14,468		667		14,710
Other loans		—		—		81		602		81		602
Total	$	2,583	$	33,089	$	4,232	$	333,478	$	6,815	$	366,567

December 31, 2010

	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
			(dollars in thousands)
Commercial	$	399	$	1,439	$	567	$	50,240	$	966	$	51,679
Real estate - commercial		1,384		20,321		856		84,802		2,240		105,123
Other real estate construction		1,818		10,355		339		41,915		2,157		52,270
Real estate construction		—		950		33		3,382		33		4,332
Real estate - residential		762		8,884		896		94,897		1,658		103,781
Home equity		136		1,065		835		50,969		971		52,034
Consumer loan		132		241		852		17,480		984		17,721
Other loans		—		—		58		739		58		739
Total	$	4,631	$	43,255	$	4,436	$	344,424	$	9,067	$	387,679

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

December 31, 2011

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	212	$	329	$	541	$	45,366	$	45,907	$	—
Real estate - commercial		2,396		2,742		5,138		109,806		114,944		—
Other real estate construction		358		2,084		2,442		29,159		31,601		—
Real estate construction		—		—		—		5,543		5,543		—
Real estate - residential		2,341		2,441		4,782		97,065		101,847		—
Home equity		298		255		553		50,860		51,413		—
Consumer loan		208		11		219		14,491		14,710		—
Other loans		—		—		—		602		602		—
Total	$	5,813	$	7,862	$	13,675	$	352,892	$	366,567	$	—

56

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

December 31, 2010

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	666	$	501	$	1,167	$	50,512	$	51,679	$	—
Real estate - commercial		1,728		8,702		10,430		94,693		105,123		—
Other real estate construction		206		7,975		8,181		44,089		52,270		—
Real estate 1 - 4 family construction		—		500		500		3,832		4,332		—
Real estate - residential		1,648		2,337		3,985		99,796		103,781		397
Home equity		110		75		185		51,849		52,034		—
Consumer loans		267		46		313		17,408		17,721		10
Other loans		—		—		—		739		739		—
Deferred cost / fees		—		—		—		90		90		—
Total	$	4,625	$	20,136	$	24,761	$	363,008	$	387,769	$	407

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off.

The composition of nonaccrual loans by class as of December 31, 2011 and 2010 is as follows:

	2011		2010
	(dollars in thousands)
Commercial	$	329	$	501
Real estate - commercial		2,742		8,702
Other real estate construction		2,084		7,975
Real estate 1 - 4 family construction		—		500
Real estate - residential		2,441		1,940
Home equity		255		75
Consumer loans		11		36
Other loans		—		—
	$	7,862	$	19,729

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

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

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

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

57

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

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

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

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2011 and 2010:

December 31, 2011

	Pass		Watch		Sub- standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	42,892	$	1,670	$	1,345	$	—	$	45,907
Real estate - commercial		95,699		7,971		11,274		—		114,944
Other real estate construction		26,256		745		4,600		—		31,601
Real estate 1 - 4 family construction		5,538		5		—		—		5,543
Real estate - residential		89,209		4,269		8,369		—		101,847
Home equity		49,743		861		809		—		51,413
Consumer loans		13,970		332		408		—		14,710
Other loans		602		—		—		—		602
Total	$	323,909	$	15,853	$	26,805	$	—	$	366,567

December 31, 2010

	Pass		Watch		Sub- standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	50,108	$	185	$	1,386	$	—	$	51,679
Real estate - commercial		81,410		4,520		18,455		738		105,123
Other real estate construction		41,709		301		10,260		—		52,270
Real estate 1 - 4 family construction		3,381		—		951		—		4,332
Real estate - residential		94,077		1,787		7,917		—		103,781
Home equity		50,902		158		974		—		52,034
Consumer loans		17,458		102		129		32		17,721
Other loans		739		—		—		—		739
Total	$	339,784	$	7,053	$	40,072	$	770	$	387,679

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2012 nonperforming loans decreased from $19.7 million at December 31, 2010 to $7.9 million at December 31, 2011, a decrease of $11.8 million. The major contributor to this decrease was a increase foreclosures and the transfer into other real estate owned of $8.2 million. The Company also had a $1.6 million loan relationship that was current and performing that had slipped into nonaccrual during 2010. This relationship was transferred back out of nonaccrual during 2011 after a proven payment history was reestablished and has remained current since that time. The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2011 and 2010:

58

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

December 31, 2011

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	45,578	$	329	$	45,907
Real estate - commercial		112,202		2,742		114,944
Other real estate construction		29,517		2,084		31,601
Real estate 1 - 4 family construction		5,543		—		5,543
Real estate - residential		99,406		2,441		101,847
Home equity		51,158		255		51,413
Consumer loans		14,699		11		14,710
Other loans		602		—		602
Total	$	358,705	$	7,862	$	366,567

December 31, 2010

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	51,178	$	501	$	51,679
Real estate - commercial		96,421		8,702		105,123
Other real estate construction		44,295		7,975		52,270
Real estate 1 - 4 family construction		3,832		500		4,332
Real estate - residential		101,444		2,337		103,781
Home equity		51,959		75		52,034
Consumer loans		17,675		46		17,721
Other loans		739		—		739
Total	$	367,543	$	20,136	$	387,679

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired a specific valuation is done and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2011 and 2010 (unpaid principal balance was grossed up for chargeoffs):

December 31, 2011

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	2,099	$	889	$	1,091	$	578	$	1,525	$	93
Real estate - commercial		14,951		11,365		1,523		452		16,520		716
Other real estate construction		4,016		2,644		1,370		107		7,746		236
Real estate 1 - 4 family construction		1,095		501		594		202		1,249		53
Real estate - residential		11,877		7,231		4,646		1,001		10,137		616
Home equity		993		753		240		124		1,194		37
Consumer loans		242		49		193		119		280		16
Other loans		—		—		—		—		—		—
Total	$	35,273	$	23,432	$	9,657	$	2,583	$	38,651	$	1,767

59

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

December 31, 2010

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	1,439	$	918	$	521	$	399	$	1,485	$	68
Real estate - commercial		21,985		16,088		4,233		1,384		13,279		1,129
Other real estate construction		10,357		2,585		7,770		1,818		9,380		609
Real estate 1 - 4 family construction		950		950		—		—		1,100		46
Real estate - residential		8,884		5,118		3,766		762		7,257		461
Home equity		1,066		677		388		136		821		40
Consumer loans		241		23		218		132		367		16
Other loans		—		—		—		—		—		—
Total	$	44,922	$	26,359	$	16,896	$	4,631	$	33,689	$	2,369

Note 5 - Troubled Debts Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the other category are TDR’s with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as a TDR are typically already on nonaccrual status and partial chargeoffs may have in some cases already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

60

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debts Restructures (Continued)

For the twelve months ended December 31, 2011, the following table presents a breakdown of the types of concessions made by loan class:

	Twelve months ended December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(dollars in thousands)
Below market interest rate:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		1		210		208
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		1	$	210	$	208
Other:
Commercial		1	$	43	$	34
Real estate - commercial		1		97		96
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		10		1,223		1,203
Home equity		—		—		—
Consumer loans		4		113		93
Other loans		—		—		—
		16	$	1,476	$	1,426
Total		17	$	1,686	$	1,634

61

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debts Restructures (Continued)

The following table presents loans that were modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the twelve months ended December 31, 2011:

	Twelve months ended December 31, 2011
	Number of Loans		Recorded Investment
	(dollars in thousands)
Below market interest rate:
Commercial		—	$	—
Real estate - commercial		—		—
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		1		208
Home Equity loans		—		—
Consumer loans		—		—
Other loans		—		—
		1	$	208
Other:
Commercial		—	$	—
Real estate - commercial		1		34
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		4		627
Home Equity loans		—		—
Consumer loans		3		76
Other loans		—		—
		8	$	737
Total		9	$	945

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2011:

	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
Below market interest rate		—	$	—		1	$	208		—	$	—		—	$	—
Other Loans		—		—		14		1,176		2		250		—		—
Total		—	$	—		15	$	1,384		2	$	250		—	$	—

62

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 - Mortgage 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 $346 million and $327 million at December 31, 2011 and 2010, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

	2011			2010			2009
	(dollars in thousands)
Beginning of year mortgage servicing rights:	$	2,134		$	1,890		$	1,293
Amounts capitalized		679			1,113			1,465
Amortization		(671	)		(869	)		(868	)
Impairment		—			—			—
End of year	$	2,142		$	2,134		$	1,890

Amortization expense is estimated as follows:

Year ending December 31,
(dollars in thousands)
2012	$	504
2013		436
2014		369
2015		301
2016		233
Thereafter		299
Total	$	2,142

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

The fair value of mortgage servicing rights was $2.5 million at both December 31, 2011 and 2010. The key assumptions used to value mortgage servicing rights as of December 31, 2011 were as follows; weighted average remaining life 267 months, weighted average discount rate 9.0%, weighted average coupon 4.71% and weighted average prepayment speed 307%.

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2011 and 2010 are listed below:

	2011		2010
	(dollars in thousands)
Land	$	4,094	$	4,081
Building and improvements		10,856		11,205
Furniture and equipment		7,254		6,128
Total fixed assets		22,204		21,414
Less accumulated depreciation		7,128		6,860
Net fixed assets	$	15,076	$	14,554

63

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 - Leases

Bank of Stanly had also entered into a noncancelable operating lease for a branch location in Locust that expired in 2010 with annual rental payments of $41,856. Bank of Stanly terminated the Locust lease in the third quarter of 2010 when the branch moved into a new building Stanly had constructed. The Company’s subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $59,850. The lease has two five-year renewal options at the expiration of the initial term.

Future minimum lease payments under these leases for years subsequent to December 31, 2011 are as follows:

Year ending December 31,
(dollars in thousands)
2012	$	60
2013		60
2014		60
2015		60
2016		60
Thereafter		40
Total	$	340

Total rental expense related to the operating leases was $60,450, $85,538, and $106,350 for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in occupancy expense.

Note 9 - Deposits

The composition of deposits at December 31, 2011 and 2010 is as follows:

	2011					2010
	Amount		Percentage of Total			Amount		Percentage of Total
	(dollars in thousands)
Demand deposits	$	62,339		15	%	$	54,837		13	%
Interest checking and money market		185,539		43	%		187,493		43	%
Savings		39,273		9	%		37,624		8	%
Time deposits $100,000 and over		58,274		13	%		59,431		14	%
Other time deposits		85,913		20	%		94,648		22	%
Total	$	431,338		100	%	$	434,033		100	%

64

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 - Deposits (Continued)

The maturities of fixed-rate time deposits at December 31, 2011 are reflected in the table below:

Year ending December 31,	Time Deposits $100,000 and Over		Other Time Deposits
	(dollars in thousands)
2012	$	28,346	$	41,695
2013		11,814		19,274
2014		2,406		8,176
2015		4,885		6,870
2016		10,823		9,898
Thereafter		—		—
Total	$	58,274	$	85,913

Note 10 - 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 2011 and 2010:

	2011					2010
	Amount		Rate			Amount		Rate
	(dollars in thousands)
At year-end
Master notes and other short term borrowing	$	7,732		0.94	%	$	10,423		0.94	%
Notes payable		59		3.80	%		59		3.82	%
Short-term advances from FHLB		13,000		2.04	%		10,000		4.42	%
	$	20,791		1.70	%	$	20,482		2.64	%
	2011					2010
	Amount		Rate			Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	4		0.74	%	$	7		1.17	%
Master notes and other short term borrowing		9,556		1.13	%		11,174		0.95	%
Notes payable		59		3.82	%		58		3.76	%
Short-term advances from FHLB		14,629		1.78	%		15,272		3.83	%
	$	24,248		1.46	%	$	26,511		2.62	%

	2011		2010
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	—	$	300
Master notes and other short term borrowing		11,110		13,454
Notes payable		59		58
Short-term advances from FHLB		20,450		23,920

65

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 - Short-Term Borrowed Funds (Continued)

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place and borrowings secured by the Uwharrie Loan Pool.

The subsidiary banks have combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $43.9 million at December 31, 2011.

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $64.6 million with remaining availability of $25.9 million at December 31, 2011. The long-term advances under this line amounted to $14.0 million and $24.0 million at December 31, 2011 and 2010, respectively. Interest rates ranged from 0.44% to 4.08% in 2011 and from 1.15% to 4.46% in 2010. The subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $11.7 million at December 31, 2011.

During the second and third quarters of 2008, the Company began a private placement of up to 7,500 fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities have a final maturity date of June 30, 2015 and may be redeemed by the Company after June 30, 2010. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $7.4 million that was outstanding at December 31, 2010. Once the final maturity drops under five years, the Company must impose a twenty percent reduction per year of the amount of the proceeds from the sale of these securities that is eligible to be counted as Tier 2 capital. At December 31, 2010 $1.5 million of the $7.4 million was excluded as Tier 2 capital. These securities were redeemed on March 31, 2011 and replaced with a new issue for subordinated debt securities discussed below.

During the second and third quarters of 2010, the Company began a private placement of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities have a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $11.1 million that was outstanding at December 31, 2011.

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 $65,621 at December 31, 2011 down from $74,456 at December 31, 2010.

66

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 - Long-Term Debt (Continued)

On May 13, 2009, the Company executed a note payable in the amount of $200,000 for the purchase of existing leased office space. The note bears interest at 3.43% and is to be paid in four equal annual payments of $50,000. The outstanding balance of this note was $100,000 and $150,000 at December 31, 2011 and 2010 respectively.

As of December 31, 2011, the scheduled maturities of these advances and notes payable are as follows:

Year ending December 31,
(dollars in thousands)
2013	$	12,560
2014		1,510
2015		11
2016		12
2017		13
Thereafter		11,127
Total	$	25,233

Note 12 - Income Tax Matters

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

	2011			2010			2009
	(dollars in thousands)
Current tax expense (benefit):
Federal	$	(838	)	$	1,021		$	428
State		34			221			146
Total		(804	)		1,242			574
Deferred tax expense (benefit):
Federal		890			(891	)		(620	)
State		110			(200	)		(117	)
Total		1,000			(1,091	)		(737	)
Net provision for income taxes	$	196		$	151		$	(163	)

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:

	2011			2010			2009
	(dollars in thousands)
Tax computed at the statutory federal rate	$	373		$	294		$	179
Increases (decrease) resulting from:
Tax exempt interest, net		(247	)		(179	)		(269	)
State income taxes, net of federal benefit		94			14			19
Other		(24	)		22			(92	)
Provision for income taxes	$	196		$	151		$	(163	)

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:

67

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 - Income Tax Matters (Continued)

	2011			2010			2009
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	2,439		$	3,253		$	1,772
Deferred compensation		595			518			635
Other		261			198			462
Valuation allowance		3			4			—
Total deferred tax assets		3,298			3,969			2,869
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		(1,164	)		(197	)		(613	)
Premises and equipment		(678	)		(381	)		(371	)
Deferred loans fees and costs		(205	)		(212	)		(214	)
Loan servicing		(206	)		(186	)		(158	)
Prepaid expenses		(149	)		(130	)		(157	)
Total deferred tax liabilities		(2,402	)		(1,106	)		(1,513	)
Net recorded deferred tax asset	$	896		$	2,863		$	1,356

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

Note 13 - 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, 2011 and 2010, outstanding financial instruments whose contract amounts represent credit risk were as follows:

	2011		2010
	(dollars in thousands)
Commitments to extend credit	$	64,224	$	82,455
Credit card commitments		8,728		8,790
Standby letters of credit		1,540		1,626
	$	74,492	$	92,871

68

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 - Commitments and Contingencies (Continued)

Contingencies

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

Financial Instruments with Concentration of Credit Risk

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

Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Banks’ policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.

Note 14 - Related Party Transactions

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

(dollars in thousands)

Balance at December 31, 2010	$	18,232
Disbursements during the year		1,610
Collections during the year		(4,965	)
Balance at December 31, 2011	$	14,877

At December 31, 2011, the Company had approved, but unused lines of credit, totaling $4.5 million to executive officers and directors, and their related interests.

69

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Shareholders’ Equity and Regulatory Matters

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

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

	Actual					Minimum For Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
			(Dollars in thousands)
December 31, 2011
Total Capital to Risk
Weighted Assets:
Consolidated	$	58,319		15.4	%	$	30,364		8.0	%	$	N/A		—	%
Bank of Stanly		33,376		13.3	%		20,035		8.0	%		25,044		10.0	%
Anson Bank and Trust		6,170		17.0	%		2,904		8.0	%		3,630		10.0	%
Cabarrus Bank and Trust		12,641		14.3	%		7,062		8.0	%		8,828		10.0	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		42,422		11.2	%		15,182		4.0	%		N/A		—	%
Bank of Stanly		30,231		12.1	%		10,018		4.0	%		15,026		6.0	%
Anson Bank and Trust		5,710		15.7	%		1,452		4.0	%		2,178		6.0	%
Cabarrus Bank and Trust		11,533		13.1	%		3,531		4.0	%		5,297		6.0	%
Tier I Capital to
Average Assets:
Consolidated		42,422		8.0	%		21,209		4.0	%		N/A		—	%
Bank of Stanly		30,231		8.8	%		13,693		4.0	%		17,117		5.0	%
Anson Bank and Trust		5,710		10.1	%		2,252		4.0	%		2,815		5.0	%
Cabarrus Bank and Trust		11,533		9.0	%		5,105		4.0	%		6,381		5.0	%

70

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)

	Actual					Minimum For Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
			(Dollars in thousands)
December 31, 2010
Total Capital to Risk
Weighted Assets:
Consolidated	$	55,534		14.4	%	$	30,793		8.0	%	$	N/A		—	%
Bank of Stanly		32,520		12.6	%		20,590		8.0	%		25,738		10.0	%
Anson Bank and Trust		5,276		13.8	%		3,050		8.0	%		3,812		10.0	%
Cabarrus Bank and Trust		12,697		13.3	%		7,623		8.0	%		9,529		10.0	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		42,171		11.0	%		15,396		4.0	%		N/A		—	%
Bank of Stanly		29,263		11.4	%		10,295		4.0	%		15,443		6.0	%
Anson Bank and Trust		4,793		12.6	%		1,525		4.0	%		2,287		6.0	%
Cabarrus Bank and Trust		11,500		12.1	%		3,811		4.0	%		5,717		6.0	%
Tier I Capital to
Average Assets:
Consolidated		42,171		7.8	%		21,615		4.0	%		N/A		—	%
Bank of Stanly		29,263		8.4	%		13,956		4.0	%		17,445		5.0	%
Anson Bank and Trust		4,793		8.4	%		2,274		4.0	%		2,842		5.0	%
Cabarrus Bank and Trust		11,500		8.9	%		5,184		4.0	%		6,480		5.0	%

As of December 31, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized all of the Company’s subsidiary banks as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorizations.

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

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

The Warrant Preferred also qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)

dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years. At December 31, 2011 the remaining discount was $200,000.

On December 31, 2008, the Company entered into agreements with its subsidiary banks to sell Fixed Rate Noncumulative Perpetual Preferred Stock to the Company to provide an avenue for investing portions of the funds received from Company’s issuance of preferred stock at the subsidiary bank level. At December 31, 2011, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.8 million in Anson and $3.0 million in Cabarrus.

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

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

For the reserve maintenance period in effect at December 31, 2011, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $2.0 million as reserves on deposit liabilities.

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. There were no shares repurchased during 2010 or 2011.

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

Note 16 - Stock Based Compensation

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2011, the SOP had 111,210 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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Stock Based Compensation (Continued)

within two years of the grant date. At December 31, 2011, the SOP II had 12,360 options outstanding and the SPP II had no options outstanding.

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2011:

	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Options outstanding at the beginning of the year		180,571		$	4.90	$	—
Options granted		—			—
Options exercised		—			—
Forfeitures		(57,001	)		4.34
Options outstanding at the end of the year		123,570		$	5.16	$	—
Options exercisable at the end of the year		118,626		$	5.15	$	—

Total options outstanding at December 31, 2011 were 123,570 at an exercise price range of $4.47 to $5.35 per share with a weighted average expected term of 2.37 years. Exercisable options at December 31, 2011 were 118,626 options at an exercise price range of $4.47 to $5.35 per share. At December 31, 2011, authorized shares of common stock reserved for future grants of options totaled 154,971 under the SOP II and 103,234 under the SPP II.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2011 and 2010 under the SOP II.

A summary of the status of the Company’s non-vested stock grants as of December 31, 2011, and changes during the year then ended is presented below:

	Shares			Weighted Average Grant Date Fair Value
Non-vested December 31, 2010		7,416		$	1.60
Granted		—			—
Vested		(2,472	)		1.60
Forfeited		—			—
Non-vested December 31, 2011		4,944			1.60

The grant date fair value of stock options vested over the years ended December 31, 2011, 2010 and 2009 was $3,960, $3,960 and $26,438 respectively.

As of December 31, 2011, there was $4,333 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 1.3 years.

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

73

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Stock Based Compensation (Continued)

There were no options exercised in 2009, 2010 or 2011.

Note 17 - Employee and Director Benefit Plans

Employees’ Savings Plus and Profit Sharing Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day if calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $306,673 in 2011, $296,466 in 2010 and $210,884 in 2009, determined as follows:

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

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

Directors’ Deferred Compensation Plan

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

Employee Stock Ownership Plan

The Company established an Employee Stock Ownership Plan (“ESOP”) to benefit all qualified employees. The ESOP purchased 293,216 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2011, the outstanding balance of the loan is $511,237 and is presented as a reduction of shareholders’ equity.

All the debt payments are made on the loans, shares associated with those debt payments are released to the ESOP and allocated among active participants on the basis of compensation in the year of allocation. Benefits vest 100% as they are allocated to participants. Dividends on 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

74

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.

The Company established a $500,000 line of credit to the ESOP in the third quarter of 2010 for the purpose of purchasing shares for the ESOP plan. Advances of $260,541 have been made under this line of credit, and a total of 79,434 unallocated shares have been purchased from the open market from the advance proceeds and pledged as collateral. The unused balance of the line of credit at December 31, 2011 was $239,459. This amount is available for future advances to purchase stock for the ESOP plan. At December 31, 2011, the outstanding balance of the loan is $260,541 and is presented as a reduction of shareholders’ equity.

During 2011 the Company continued to expense approximately 2% of salaries as a contribution to the ESOP Plan the same as 2010 compared to 3% contributed in 2009. The reduction in the percentage contributed was due to an increase in contributions to the Employees’ Savings Plus and Profit Sharing Plan which was increased from a maximum match of 3% to a maximum match of 4% of associate contributions. Expenses of $219,657, $229,011 and $350,068 during the years ended December 31, 2011, 2010 and 2009, respectively, were incurred in connection with the ESOP.

At December 31, 2011, 409,129 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP’s participants for purposes of computing earnings per share. There were 160,883 shares unallocated with a fair value of approximately $519,652 at December 31, 2011.

Supplemental Executive Retirement Plan

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

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.

The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

During 2011, 2010 and 2009 a provision of $266,800, $266,800 and $500,800, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation

75

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

deferred under the plan amounts to $2.0 million and $1.7 million at December 31, 2011 and 2010, respectively.

Split-Dollar Life Insurance

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2011 and 2010, the expense income associated with these policies was $53,938 and $(12,322), respectively.

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at December 31, 2011 and 2010, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2011 and 2010:

	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	28,687	$	28,687	$	13,624	$	13,630
Securities available for sale		88,661		88,661		96,395		96,395
Loans held for investment, net		359,860		374,636		387,769		392,017
Loans held for sale		1,958		1,958		6,286		6,286
FHLB Stock and FRB Stock		3,289		3,289		4,031		4,031
Bank-owned life insurance		6,171		6,171		5,975		5,975
Mortgage servicing rights		2,128		2,494		2,134		2,522
Accrued interest receivable		2,084		2,084		2,408		2,408
Financial Liabilities
Deposits	$	431,338	$	430,641	$	434,033	$	439,298
Short-term borrowings		20,791		20,791		20,482		20,482
Long-term debt		25,233		25,894		34,061		35,625
Accrued interest payable		301		301		342		342

76

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The carrying amount of cash and cash equivalents and accrued interest, approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. It is not practicable to determine fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability so it is presented at its carrying value. The carrying amount of bank-owned life insurance is the current cash surrender value. Fair value for mortgage servicing assets is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

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

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

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

• Borrowings - The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analysis using offered market rates. The fair value of the unsecured debt does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

At December 31, 2011, 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 13.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010:

	December 31, 2011
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	33,532	$	33,532	$	—	$	—
US Gov’t		19,997		—		19,997		—
Mortgage-backed securities and CMO’s		24,263		—		24,263		—
State and political subdivisions		10,869		—		10,869		—
Total assets at fair value	$	88,661	$	33,532	$	55,129	$	—
Total liabilities at fair value	$	—	$		$	—	$	—
	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	51,148	$	51,148	$	—	$	—
US Gov’t		25,463		—		25,463		—
Mortgage-backed securities and CMO’s		8,900		—		8,900		—
State and political subdivisions		10,884		—		10,884		—
Total assets at fair value	$	96,395	$	51,148	$	45,247	$	—
Total liabilities at fair value	$	—	$		$	—	$	—

Prices for US Treasury are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

78

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2011 and December 31, 2010:

	December 31, 2011
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	7,074	$	—	$	—	$	7,074
Loans held for sale		1,958		—		1,958		—
Other real estate owned		1,464		—		—		1,464
Total assets at fair value	$	10,496	$	—	$	1,958	$	8,538
Total liabilities at fair value	$	—	$	—	$	—	$	—
	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	12,265	$	—	$	—	$	12,265
Loans held for sale		6,286		—		6,286		—
Other real estate owned		275		—		—		275
Total assets at fair value	$	18,826	$	—	$	6,286	$	12,540
Total liabilities at fair value	$	—	$	—	$	—	$	—

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

Interest Rate Risk

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

79

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data

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

Condensed Balance Sheets

	December 31,
	2011		2010
	(dollars in thousands)
Assets
Cash and demand deposits with bank subsidiaries	$	307	$	859
Interest-earning deposits with bank subsidiaries		9,142		11,271
Investments in:
Bank subsidiaries		50,596		46,878
Nonbank subsidiaries		913		704
Other assets		2,453		2,612
Total assets	$	63,411	$	62,324
Liabilities and shareholders’ equity
Master notes	$	6,208	$	8,594
Junior subordinated debentures		11,127		9,895
Other liabilities		473		342
Shareholders’ equity		45,603		43,493
Total liabilities and shareholders’ equity	$	63,411	$	62,324

Condensed Statements of Income

	2011			2010			2009
	(dollars in thousands)
Equity in earnings of subsidiaries	$	1,649		$	1,445		$	1,260
Interest income		64			50			113
Management and service fees		6,689			6,407			5,468
Other income		104			26			91
Interest expense		(674	)		(479	)		(533	)
Other operating expense		(7,304	)		(7,003	)		(6,122	)
Income tax benefit		372			267			413
Net income	$	900		$	713		$	690
Net income	$	900		$	713		$	690
Dividends - preferred stock		(645	)		(645	)		(642	)
Net Income available to common shareholders	$	255		$	68		$	48
Net income per common share
Basic	$	0.03		$	0.01		$	0.01
Diluted	$	0.03		$	0.01		$	0.01
Weighted average shares outstanding
Basic		7,467,396			7,485,373			7,474,140
Diluted		7,467,396			7,485,373			7,474,140

80

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows

	2011			2010			2009
	(dollars in thousands)
Cash flows from operating activities
Net income	$	900		$	713		$	690
adjustments to reconcile net income to net cash used by operating activities:
Equity in earnings of subsidiaries		(1,649	)		(1,445	)		(1,260	)
(Increase) decrease in other assets		(203	)		174			(753	)
Increase (decrease) in other liabilities		131			7			(30	)
Net cash used by operating activities		(821	)		(551	)		(1,353	)
Cash flows from investing activities
Dividends received from subsidiaries		—			1,300			900
Net cash provided by investing activities		—			1,300			900
Cash flows from financing activities
Net increase (decrease) in master notes		(2,386	)		(2,888	)		2,579
Net increase (decrease) in long-term debt		—			—			(2,600	)
Net proceeds from issuance of junior subordinated debentures		1,232			2,476			—
Increase in unearned ESOP compensation		(161	)		(100	)		—
Dividends on preferred stock		(545	)		(545	)		(542	)
Net cash used by financing activities		(1,860	)		(1,057	)		(563	)
Net decrease in cash and cash equivalents		(2,681	)		(308	)		(1,016	)
Cash and cash equivalents at beginning of year		12,130			12,438			13,454
Cash and cash equivalents at end of year	$	9,449		$	12,130		$	12,438

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(in thousands except per share and shares outstanding information)

	2011			2010			2009			2008			2007
Summary of Operations
Interest income	$	23,822		$	24,487		$	25,062		$	25,564		$	26,909
Interest expense		4,737			5,951			7,697			9,828			11,876
Net interest income		19,085			18,536			17,365			15,736			15,033
Provision for loan losses		3,456			4,919			1,732			969			15
Noninterest income		8,256			9,898			5,824			6,597			6,590
Noninterest expense		22,789			22,651			20,930			18,531			17,362
Income tax expense(benefit)		196			151			(163	)		804			1,287
Net income	$	900		$	713		$	690		$	2,029		$	2,959
Per Common Share
Net income - basic (1)	$	0.03		$	0.01		$	0.01		$	0.27		$	0.39
Net income - diluted (1)		0.03			0.01			0.01			0.27			0.39
Book value (1)		4.65			4.38			4.47			4.11			4.14
Weighted Average Shares
Outstanding:
Basic (1)		7,467,396			7,485,373			7,474,140			7,482,488			7,603,494
Diluted (1)		7,467,396			7,485,373			7,474,140			7,520,484			7,706,832
Ratios
Return on average assets		0.17	%		0.14	%		0.15	%		0.48	%		0.75	%
Return on average equity		2.02	%		1.57	%		1.60	%		6.29	%		9.73	%
Average equity to average assets		8.39	%		8.83	%		9.15	%		7.63	%		7.73	%
Selected Year-end Balances
Assets	$	526,902		$	535,426		$	477,846		$	452,468		$	411,944
Loans held for investment		366,675			387,769			353,729			340,830			321,987
Securities		88,661			96,395			76,317			68,835			51,005
Deposits		431,338			434,033			376,774			353,627			324,657
Borrowed funds		46,024			54,543			53,583			54,751			53,619
Shareholders’ equity		45,603			43,493			44,024			41,233			31,574
Selected Average Balances
Assets	$	529,970		$	514,425		$	471,729		$	422,857		$	393,188
Loans held for investment		381,419			375,381			346,976			335,791			308,149
Securities		90,701			86,780			78,049			48,926			41,188
Deposits		430,998			406,304			369,957			337,384			312,261
Borrowed funds		50,529			58,291			55,084			50,643			48,075
Shareholders’ equity		44,462			45,425			43,182			32,245			30,402

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2007 and 2008 have been adjusted to reflect 3% stock dividends issued in 2008 and 2007. There was not a stock dividend issued in 2011, 2010 or 2009.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 37 - 82 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect 3% stock dividends in 2008 and 2007. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Financial Condition at December 31, 2011 and December 31, 2010

The Company’s total assets decreased $8.5 million or 1.59% from $535.4 million at December 31, 2010 to $526.9 million at December 31, 2011. This decrease resulted primarily from a $21.1 million decrease in loans held for investment and a $7.7 million decrease in securities available for sale.

Cash and cash equivalents increased $15.0 million during the year ended December 31, 2011. Cash and due from banks grew $2.5 million, while interest-earning deposits with banks increased $12.5 million.

Investment securities decreased $7.7 million or 8.0%, from $96.4 million at December 31, 2010 to $88.7 million at December 31, 2011. During the year in an effort to improve our interest rate risk position, management made the decision to shorten the duration of our investment portfolio by selling $24.6 million of securities, including $22.7 million of US Treasuries and government agency bonds and $1.9 million of small mortgage backed securities. The Company realized a gain of $933,000 on these transactions. The proceeds from these sales are being reinvested in defensive duration mortgage backed securities which will provide a shorter maturity and a monthly cash flow and protection in a rising rate environment. At December 31, 2011, the Company had net unrealized gains of $3.4 million.

Loans held for investment decreased $21.1 million from $387.8 million at December 31, 2010 to $366.7 million at December 31, 2011. The Company experienced declines in growth trends in all areas of the loan portfolio except commercial real estate and real estate 1-4 family construction, which increased $9.8 million and $1.2 million, respectively. Other real estate construction and commercial loans experienced the largest declines at 39.4% and 11.2%, respectively. Loans held for sale decreased 68.9% or $4.3 million compared to the prior year. This decrease was attributed to the volatility in mortgage rates and a decline in demand as rates

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

increased. The allowance for loan losses was $6.8 million at December 31, 2011, which represents 1.86% of the loan portfolio, a decrease from $9.1 million or 2.34% at December 31, 2010. During 2011, the Company foreclosed on several loan relationships that played a major part in net chargeoffs of $5.8 million for the year ended December 31, 2011 compared to $1.1 million for 2010. This increase in chargeoffs directly affected the decline in allowance for loss.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Premises and equipment, bank owned life insurance and other real estate owned increased $522,000, $196,000 and $8.2 million, respectively. As aforementioned, the Company foreclosed on several loans during the period, with two relationships totaling $5.1 million contributing largely to the increase in other real estate owned. The Company does have $1.1 million of other real estate owned under contract to sell and is expected to close on those transactions later in the first quarter of 2012. Accrued interest receivable and prepaid assets declined $324,000 and $741,000, respectively. Federal Home Loan Bank stock decreased $766,000 because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock also increased $24,000 during the year, included in other assets which increased $194,000 for the year.

Customer deposits continued to be our principal funding source in 2011. At December 31, 2011, deposits from our customers totaled $431.3 million, a decrease of $2.7 million, or 0.62%, from $434.0 million at December 31, 2010. Demand noninterest bearing checking increased $7.5 million, while interest savings accounts increased $1.6 million for the period. Interest checking and money market accounts declined $2.0 million during 2011. Time deposits over $100,000 and other time deposits declined $1.2 million and $8.7 million respectively during 2011, primarily from a shift to other deposit accounts.

During 2011 the Company’s net borrowings decreased by $8.5 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2011, $27 million of the total borrowings of $46.0 million were attributed to Federal Home Loan Bank advances. During the third quarter of 2010, the Company began a second junior subordinated debt offering. This offering was completed in 2011 raising $11.1 million. The Company called the first junior subordinated debt issued in 2008 in March of 2011 at the completion of the second offering. See note 11 for additional information on the new offering.

At December 31, 2011, total shareholders’ equity was $45.6 million, an increase of $2.1 from December 31, 2010. Net income for the period was $900,000. Net income was offset by a net increase in unearned ESOP compensation of $80,000. Net income was also offset as the Company recorded $545,000 in dividends on its series A and B preferred stock for the twelve month period. The other factor related to the increase in total equity was an increase of $1.9 million in unrealized gains on investment securities. At December 31, 2011, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Results of Operations for the Years Ended December 31, 2011 and 2010

Earnings

Uwharrie Capital Corp reported net income of $900,000 for the twelve months ended December 31, 2011, as compared to $713,000 for the twelve months ended December 31, 2010, an increase of $187,000. Net income available to common shareholders was $255,000 or $0.03 per common share at December 31, 2011, compared to $68,000 or $0.01 per common share at December 31, 2010. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

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

Net interest income increased $549,000 to $19.1 million for 2011 compared to the $18.5 million earned in 2010. During the year ended December 31, 2011 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $562,000. The average yield on our interest-earning assets decreased 26 basis points to 4.99%, while the average rate we paid for our interest-bearing liabilities decreased 32 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in an increase of six basis points in our interest rate spread, from 3.81% in 2010 to 3.87% in 2011. Our net interest margin for 2011 was 4.01%, compared to 3.99% in 2010. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a strong interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 96 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 97 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 $3.5 million and $4.9 million for the twelve months ended December 31, 2011 and 2010 respectively. There were net loan charge-offs of $5.7 million for the twelve months ended December 31, 2011 as compared with net loan charge-offs of $1.1 million during the same period of 2010. Refer to the Asset Quality discussion beginning on page 88 for further information.

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 16.6%, from $9.9 million in 2010, to $8.3 million in 2011, a decrease of $1.6 million. While the Company benefited from another strong year of income from mortgage loan sales, income from mortgage loan sales declined $1.4 million to $1.8 million for 2011 compared to $3.2 million during 2010. Even with the volatility in interest rates during the year, mortgage loan rates continued to be attractive for buyers and rates did decline at several times during 2011 allowing customers to be able to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $1.8 million, a decrease of 17.2%. These decreases were offset by an increase in other service fees and commissions of $526,000 generated mainly from brokerage commissions and asset management fees which increased $312,000 to $1.8 million and other banking fees which increased $214,000 during 2011. The recent downturn in the economy over the last several years that impacted the overall stock market and customer’s confidence to actively trade continued to turn around in 2011 contributing to the growth in brokerage commissions and asset management fees. The Company realized gains from the sale of securities of $933,000 on the securities available for sale compared to realized losses of $1.5 million in 2010.

Noninterest Expense

Noninterest expense for the year ended December 31, 2011 was $22.8 million compared to $22.7 million for the same period of 2010, a small increase of $138,000. Salaries and employee benefits, the largest component of noninterest expense, increased $473,000, from $11.6 million for the period ending December 31, 2010 to $12.1 million for the same period in 2011. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Professional fees and services increased $258,000, while foreclosed real estate expense increased $102,000 both due mainly to increased loan collection costs. Data processing costs reflected a modest increase of $5,000, while software costs increased by $31,000. Growth in electronic banking operations, including preparation for new services, created increased expense of $64,000. These increases were offset by a decline in marketing and donations expense of $522,000 that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development. Net occupancy and equipment expense had a combined decrease of $39,000. Other noninterest expense also decreased $142,000 for the comparable twelve month period. The table on page 100 reflects the additional breakdown of other noninterest expense. FDIC assessment costs decreased $45,000 during the twelve month ending December 31, 2011. During 2009, the FDIC had implemented a special one-time assessment which amounted to $209,000 for the Company’s subsidiary banks that did not recur during 2010 or 2011.

Income Tax Expense

The Company had an income tax expense of $196,000 for 2011 at an effective tax rate of 17.88% compared to income tax expense of $151,000 in 2010 with an effective tax rate of 17.48%. Income taxes computed at the statutory rate and are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance.

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Results of Operations for the Years Ended December 31, 2010 and 2009

Earnings

Uwharrie Capital Corp reported net income of $713,000 for the twelve months ended December 31, 2010, as compared to $690,000 for the twelve months ended December 31, 2009, an increase of $23,000. Net income available to common shareholders was $68,000 or $0.01 per common share at December 31, 2010, compared to $48,000 or $0.01 per common share at December 31, 2009. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

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

Net interest income increased $1.2 million to $18.5 million for 2010 compared to the $17.4 million earned in 2009. During the year ended December 31, 2010 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $1.9 million. The average yield on our interest-earning assets decreased 64 basis points to 5.25%, while the average rate we paid for our interest-bearing liabilities decreased 59 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in a decrease of five basis points in our interest rate spread, from 3.86% in 2009 to 3.81% in 2010. Our net interest margin for 2010 was 3.99%, compared to 4.12% in 2009. Financial Table 1 on page 96 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 97 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $4.9 million and $1.7 million for the twelve months ended December 31, 2010 and 2009 respectively. There were net loan charge-offs of $1.1 million for the twelve months ended December 31, 2010 as compared with net loan charge-offs of $817,000 during the same period of 2009. Refer to the Asset Quality discussion beginning on page 88 for further information.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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

Noninterest Expense

Noninterest expense for the year ended December 31, 2010 was $22.7 million compared to $20.9 million for the same period of 2009, an increase of $1.8 million. Salaries and employee benefits, the largest component of noninterest expense, increased $121,000, from $11.5 million for the period ending December 31, 2009 to $11.6 million for the same period in 2010. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy and equipment expense had a combined increase of $189,000. Professional fees and services increased $262,000 due mainly to increased loan collection costs. Data processing costs reflected a modest increase of $61,000, while software costs increased by $72,000. Growth in electronic banking operations, including preparation for new services, created increased expense of $83,000. Marketing and donations expense grew by $545,000 and included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development. Other noninterest expense increased $334,000 for the comparable twelve month period. The table on page 100 reflects the additional breakdown of other noninterest expense. FDIC assessment costs decreased $163,000 during the twelve month ending December 31, 2010. During 2009, the FDIC had implemented a special one-time assessment which amounted to $209,000 for the Company’s subsidiary banks that did not recur during 2010.

Income Tax Expense

The Company had an income tax expense of $151,000 for 2010 at an effective tax rate of 17.48% compared to income tax benefit of $163,000 in 2009. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance.

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

and by recoveries of amounts previously charged off and is reduced by loans charged off. Management continuously evaluates the adequacy of the allowance for loan loss. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function, through a review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loans observable market price or the estimated fair value of the underlying collateral less the selling costs, if the loan is deemed to be collateral dependent. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss, and reserves are allocated based on management’s judgment and historical experience.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for inherent risk in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the 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 banking 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.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

The provision for loan losses was $3.5 million for the year ended December 31, 2011 as compared to $4.9 million for the same period in 2010. At the end of 2011 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $33.1 million compared to $43.3 million at December 31, 2010, a decrease of $10.2 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $19.7 million at December 31, 2010 to $7.9 million at December 31, 2011. The primary factor in the decrease in both impaired and nonaccrual loans was the increase in foreclosures and the subsequent increase of $8.2 million in other real estate owned. The Company also had a $1.6 million loan relationship that was current and performing for a period of time but which was placed in nonaccrual until there was a proven payment history could be reestablished. This relationship was transferred out of nonaccrual and into the current portfolio during the second quarter of 2011. The Company had net loan charge-offs for 2011 of $5.7 million compared to net loan charge-offs of $1.1 million for the same period in 2010. During 2011 the Company had two loan relationships with chargeoffs totaling $2.6 million that greatly impacted the increase.

The allowance expressed as a percentage of gross loans held for investment decreased 48 basis points from 2.34% at December 31, 2010 to 1.86% at December 31, 2011. The decrease in the allowance was a direct impact of the write down and chargeoff of impaired loans. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.29% at December 31, 2010 and 1.27% at December 31, 2011, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 10.71% to 7.81%, a decrease of 290 basis points. During 2011, along with the aforementioned chargeoffs of $1.2 million, the Company had several partial charge-offs contributing to the decrease. During the third quarter of 2010 we upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations. During the first quarter of 2011 the Company added an additional section to its loan loss model to account for other qualitative and/or environmental factors. This new section accounted for $42,000 in increased reserves during the year. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 5.19% at December 31, 2010, to 2.14% at December 31, 2011. As discussed above, during the period the Company had a net increase of $8.2 million in other real estate owned. The primary components of the increase in other real estate owned were, two loan relationships which consisted of six pieces of property totaling $5.1 million. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at December 31, 2011 totaled $6.0 million and $5.1 millionat December 31, 2010.

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

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Nonperforming Assets

(dollars in thousands)

	At December 31,
	2011			2010			2009			2008			2007
Nonperforming Assets:
Nonaccrual loans past due 90 days or more	$	—		$	407		$	282		$	3		$	—
Nonaccrual loans		7,862			19,730			5,630			3,898			1,795
Other real estate owned		10,258			2,022			3,419			2,816			163
Total nonperforming assets	$	18,120		$	22,159		$	9,331		$	6,717		$	1,958
Allowance for loan losses	$	6,815		$	9,067		$	5,276		$	4,361		$	3,510
Nonperforming loans to total loans		2.14	%		5.19	%		1.67	%		1.14	%		0.56	%
Allowance for loan losses to total loans		1.86	%		2.34	%		1.49	%		1.28	%		1.09	%
Nonperforming assets to total assets		3.44	%		4.14	%		1.95	%		1.48	%		0.48	%
Allowance for loan losses to nonperforming loans		86.88	%		45.03	%		89.24	%		111.79	%		195.54	%

Capital Resources

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

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier I leverage ratio of 4%. Banks which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a Tier I leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2011, the Company’s subsidiary banks were all well capitalized.

The Company expects to continue to exceed these minimums without altering current operations or strategy. Note 15 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 last declared a 3% stock dividend in 2008. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends. There was not a dividend declared in 2011, 2010 or 2009.

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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 99, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2011 included $23.8 million in federal funds lines of credit from correspondent banks and approximately $25.9 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $20.1 million. 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, 2011, borrowings from federal funds lines and the issuance of commercial paper amounted to $5.8 million, while other short-term borrowings totaled $15.0 million. Long-term debt at that date consisted of advances of $14.0 million from the Federal Home Loan Bank, junior subordinated debt of $11.1 million, a mortgage payable of $59,000 and a note payable for the purchase of a building of $50,000.

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

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2011.

	Payments Due by Period (in thousands)
	Total		On Demand or less than 1 year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Short-term debt	$	20,791	$	20,791	$	—	$	—	$	—
Long-term debt		25,233		—		14,070		23		11,140
Operating leases		340		60		120		120		40
Total contractual cash obligations, excluding deposits		46,364		20,851		14,190		143		11,180
Deposits		431,338		357,192		41,670		32,476		—
Total contractual cash obligations, including deposits	$	477,702	$	378,043	$	55,860	$	32,619	$	11,180

Critical Accounting Policy

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 Note

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

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

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. The evaluation of goodwill for impairment included both the income and market approaches to value the Company. The income approach consisted of discounting projected long-term future cash flows, which were derived from internal forecasts and economic expectations for the Company. The significant input to the income approach included the discount rate, which was determined utilizing the Company’s cost of capital adjusted for a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. This method also included different levels of increased cash flows to be generated from estimated synergies obtained assuming collapsing the bank charters and removal of certain nonrecurring expenses. Under the market approach, a value was calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions. Our goodwill testing performed as of October 31, 2011 and subsequent evaluation through December 31, 2011 for triggering events indicated that the Company’s fair value supported the recorded goodwill.

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And Results of Operations

Income Taxes

The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination. Management’s determination of the realization of the net deferred tax asset is based upon management’s evaluation of positive and negative evidence related to cumulative pretax earnings over a three year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.

Valuation of Foreclosed Assets

Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

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 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

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

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 2011 is reflected in Financial Table 3 on page 66. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional gap analysis. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rates environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary banks, using a no growth and most likely balance sheet growth, for a two year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one year horizon, indicates a negative impact of (7.95%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 8.78% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, all three of the subsidiary banks are asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. All three of the subsidiary banks have the potential to benefit from a rising

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And Results of Operations

interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

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

95

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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)

	2011							2010							2009
	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	$	80,089		1,777		2.22	%	$	78,479		2,508		3.20	%	$	63,934	$	3,128		4.89	%
Non-taxable securities (1)		10,612		371		5.70	%		8,301		319		6.25	%		14,115		622		7.17	%
Short-term investments		13,282		65		0.49	%		9,211		44		0.48	%		6,334		66		1.04	%
Taxable loans (2)		372,415		21,222		5.70	%		371,057		21,378		5.76	%		345,448		21,020		6.08	%
Non-taxable loans (1)		10,152		387		6.20	%		6,258		238		6.18	%		4,387		226		8.38	%
Total interest-earning assets		486,550		23,822		4.99	%		473,306		24,487		5.25	%		434,218		25,062		5.89	%
Non-earning assets
Cash and due from banks		6,470							6,449							7,057
Premises and equipment, net		14,814							14,246							12,616
Interest receivable and other		22,136							20,424							17,838
Total non-earning assets		43,420							41,119							37,511
Total assets	$	529,970						$	514,425						$	471,729
Interest-bearing liabilities
Savings deposits	$	39,432	$	286		0.73	%	$	35,535	$	327		0.92	%	$	30,912	$	255		0.82	%
Interest checking & MMDA		178,947		785		0.44	%		162,373		971		0.60	%		120,307		838		0.70	%
Time deposits		154,887		2,244		1.45	%		158,173		2,876		1.82	%		172,108		4,816		2.80	%
Total deposits		373,266		3,315		0.89	%		356,081		4,174		1.17	%		323,327		5,909		1.83	%
Short-term borrowed funds		24,133		354		1.47	%		26,352		693		2.63	%		24,092		316		1.31	%
Long-term debt		26,396		1,068		4.05	%		31,939		1,084		3.39	%		30,992		1,472		4.75	%
Total interest-bearing liabilities		423,795		4,737		1.12	%		414,372		5,951		1.44	%		378,411		7,697		2.03	%
Noninterest liabilities
Transaction deposits		57,732							50,223							46,630
Interest payable and other		3,981							4,405							3,506
Total liabilities		485,508							469,000							428,547
Shareholders’ equity		44,462							45,425							43,182
Total liabilities and shareholders equity	$	529,970						$	514,425						$	471,729
Interest rate spread						3.87	%						3.81	%						3.86	%
Net interest income and net interest margin			$	19,085		4.01	%			$	18,536		3.99	%			$	17,365		4.12	%

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.

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And Results of Operations

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)

	2011 Versus 2010									2010 Versus 2009
	Volume			Rate			Net Change			Volume			Rate			Net Change
Interest-earning assets
Taxable securities	$	44		$	(775	)	$	(731	)	$	588		$	(1,208	)	$	(620	)
Non-taxable securities		85			(33	)		52			(240	)		(63	)		(303	)
Short-term investments		20			1			21			22			(44	)		(22	)
Taxable loans		78			(234	)		(156	)		1,517			(1,159	)		358
Non-taxable loans		148			1			149			84			(72	)		12
Total interest-earning assets		375			(1,040	)		(665	)		1,971			(2,546	)		(575	)
Interest-bearing liabilities
Savings deposits		32			(73	)		(41	)		40			32			72
Transaction and MMDA deposits		86			(272	)		(186	)		272			(139	)		133
Other time deposits		(54	)		(578	)		(632	)		(322	)		(1,618	)		(1,940	)
Short-term borrowed funds		(45	)		(294	)		(339	)		45			332			377
Long-term debt		(206	)		190			(16	)		39			(427	)		(388	)
Total interest-bearing liabilities		(187	)		(1,027	)		(1,214	)		74			(1,820	)		(1,746	)
Net interest income	$	562		$	(13	)	$	549		$	1,897		$	(726	)	$	1,171

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.

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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	$	8,605		$	—		$	—		$	4,329		$	8,266		$	21,200
Investment securities		927			1,428			3,719			33,410			49,177			88,661
FHLB and other stock		—			—			—			—			3,789			3,789
Loans held for sale		1,958			—			—			—			—			1,958
Loans held for investment		104,614			25,982			44,705			140,084			51,290			366,675
Total interest-earning assets		116,104			27,410			48,424			177,823			112,522			482,283
Interest-bearing liabilities
Deposits		39,514			26,247			45,521			212,413			107,643			431,338
Short-term borrowed funds		17,731			2,060			1,000			—			—			20,791
Long-term debt		—			—			—			14,106			11,127			25,233
Total interest-bearing liabilities		57,245			28,307			46,521			226,519			118,770			477,362
Interest sensitivity GAP per period	$	58,859		$	(897	)	$	1,903		$	(48,696	)	$	(6,248	)	$	4,921
Cumulative interest sensitivity GAP	$	58,859		$	57,962		$	59,865		$	11,169		$	4,921		$	4,921
Ratios
Cumulative gap as a percentage of total interest-earning assets		12.20	%		12.02	%		12.41	%		2.32	%		1.02	%		1.02	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		202.82	%		167.75	%		145.33	%		103.11	%		101.03	%		101.03	%

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And Results of Operations

Financial Table 4

Investment Securities Portfolio Analysis

(dollars in thousands)

	December 31, 2011
	Amortized Cost		Estimated Fair Value		Book Yield(1)
Securities available for sale
U. S. Treasury
Due within one year		999		1,009		1.50	%
Due after one but within five years		4,071		4,377		2.60	%
Due after five but within ten years		27,003		28,146		1.81	%
		32,073		33,532		1.90	%
U.S. Government agencies
Due one within one year		1,288		1,319		4.48	%
Due after one but within five years		17,854		18,678		2.32	%
		19,142		19,997		2.46	%
Mortgage-backed securities
Due after five but within ten year		3,387		3,557		3.28	%
Due after ten years		20,629		20,706		3.19	%
		24,016		24,263		3.20	%
State and political
Due within one year		125		126		5.23	%
Due after one but within five years		3,634		3,784		4.13	%
Due after five but within ten year		4,708		5,208		3.07	%
Due after ten years		1,604		1,751		4.14	%
		10,071		10,869		3.65	%
Total Securities available for sale
Due within one year		2,412		2,454		3.28	%
Due after one but within five years		25,559		26,839		2.62	%
Due after five but within ten year		35,098		36,911		2.12	%
Due after ten years		22,233		22,457		3.26	%
	$	85,302	$	88,661		2.60	%

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.

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And Results of Operations

Financial Table 5

Noninterest Income

(dollars in thousands)

	Year Ended December 31,
	2011			2010			2009
Service charges on deposit accounts	$	1,837		$	2,219		$	2,360
Other banking fees		1,576			1,362			1,023
Asset management fees		1,670			1,357			1,054
Brokerage commissions		163			164			196
Other noninterest income		353			543			480
Income from mortgage loan sales		1,806			3,172			3,436
Security gains (losses)		933			1,484			(711	)
Loss on nonmarketable securities		—			—			(172	)
Total other-than-temporary impairment loss		—			—			(1,807	)
Portion of loss recognized in other comprehensive income		—			—			—
Net impairment recognized in other comprehensive income		—			—			(1,807	)
Losses from sale of OREO		(68	)		(332	)		(36	)
Other gains (losses) from sale of assets		(14	)		(71	)		1
Total noninterest income	$	8,256		$	9,898		$	5,824

Financial Table 6

Other Noninterest Expense

(dollars in thousands)

	Year Ended December 31,
	2011		2010		2009
Postage	$	192	$	221	$	200
Telephone and data lines		167		233		237
Loan collection cost		250		330		185
Shareholder relations expense		93		150		187
Dues and subscriptions		157		186		161
Other		1,747		1,628		1,444
Total other noninterest expense	$	2,606	$	2,748	$	2,414

100

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Financial Table 7

Loan Portfolio Composition

(dollars in thousands)

	At December 31,
	2011						2010						2009
	Amount			% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	45,907			12.52	%	$	51,679			13.33	%	$	51,723			14.63	%
Real estate - construction		37,144			10.13	%		56,602			14.60	%		44,976			12.72	%
Real estate - residential		153,260			41.81	%		155,814			40.19	%		144,154			40.77	%
Real estate - commercial		114,944			31.36	%		105,123			27.12	%		95,938			27.13	%
Consumer		14,710			4.01	%		17,721			4.57	%		16,628			4.70	%
Other		602			0.16	%		739			0.19	%		172			0.05	%
Total loans		366,567			100.00	%		387,678			100.00	%		353,591			100.00	%
Less:
Allowance for loan losses		(6,815	)					(9,067	)					(5,276	)
Unearned net loan fees		108						91						138
Net loans	$	359,860					$	378,702					$	348,453

	At December 31,
	2008						2007
	Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	45,470			13.35	%	$	37,724			11.72	%
Real estate - construction		50,661			14.87	%		46,546			14.46	%
Real estate - residential		139,346			40.90	%		135,842			42.21	%
Real estate - commercial		89,561			26.29	%		86,593			26.90	%
Consumer		15,499			4.55	%		15,022			4.67	%
Other		121			0.04	%		143			0.04	%
Total loans		340,658			100.00	%		321,870			100.00	%
Less:
Allowance for loan losses		(4,361	)					(3,510	)
Unearned net loan fees		172						117
Net loans	$	336,469					$	318,477

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Financial Table 8

Selected Loan Maturities

(dollars in thousands)

	December 31, 2011
	One Year or Less		One to Five Years		Over Five Years		Total
Commercial and agricultural	$	21,021	$	16,302	$	8,584	$	45,907
Real estate - construction		15,026		16,485		5,633		37,144
Total selected loans	$	36,047	$	32,787	$	14,217	$	83,051
Fixed rate loans	$	19,932	$	93,633	$	83,195	$	196,760
Sensitivity to rate changes:
Variable interest rates	$	169,915	$	—	$	—	$	169,915

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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,
	2011			2010			2009			2008			2007
Allowance for loan losses at beginning of year	$	9,067		$	5,276		$	4,361		$	3,510		$	3,171
Provision for loan losses		3,456			4,919			1,732			969			15
Other		(5	)		17			—			—			—
Loan charge-offs:
Commercial		336			59			39			122			—
Real estate		5,110			924			692			15			—
Consumer		390			206			140			151			224
Total charge-offs		5,836			1,189			871			288			224
Recoveries of loans previously charged off:
Commercial		4			3			19			120			440
Real estate		28			4			14			—			—
Consumer		101			37			21			50			108
Total recoveries		133			44			54			170			548
Net charge-offs (recoveries)		5,703			1,145			817			118			(324	)
Allowance for loan losses at end of year	$	6,815		$	9,067		$	5,276		$	4,361		$	3,510
Net (charge-offs) recoveries as a percent of average loans		1.50	%		0.31	%		0.24	%		0.04	%		(0.11	)%

103

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And Results of Operations

Financial Table 10

Allocation of the Allowance for Loan Losses

(dollars in thousands)

	At December 31,
	2011					2010					2009
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	1,127		12.52	%	$	966		13.33	%	$	449		14.63	%
Real estate - construction		557		10.13	%		2,190		14.60	%		1,373		12.72	%
Real estate - residential		2,924		41.81	%		2,629		40.19	%		1,477		40.77	%
Real estate - commercial		1,459		31.36	%		2,240		27.12	%		1,541		27.13	%
Consumer loans		667		4.01	%		984		4.57	%		436		4.70	%
Other		81		0.16	%		58		0.19	%		—		0.05	%
Unallocated		—		—	%		—		—	%		—		—	%
Total loans	$	6,815		100.00	%	$	9,067		100.00	%	$	5,276		100.00	%

	At December 31,
	2008					2007
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	288		13.35	%	$	326		11.72	%
Real estate - construction		1,232		14.87	%		325		14.46	%
Real estate - residential		1,180		40.90	%		922		42.21	%
Real estate - commercial		1,385		26.29	%		1,715		26.90	%
Consumer		276		4.55	%		222		4.67	%
Other		—		0.04	%		—		0.04	%
Unallocated		—		—	%		—		—	%
Total loans	$	4,361		100.00	%	$	3,510		100.00	%

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

104

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And Results of Operations

Financial Table 11

Maturities of Time Deposits

(dollars in thousands)

	3 Months or Less		Over 3 Months to 6 Months		Over 6 Months to 12 Months		Over 12 Months		Total
Time Deposits of $100,000 or more	$	11,827	$	7,076	$	9,443	$	29,928	$	58,274
Other Time Deposits		13,538		10,119		18,038		44,218		85,913
	$	25,365	$	17,195	$	27,481	$	74,146	$	144,187

Financial Table 12

Performance Ratios

	At December 31,
	2011			2010			2009			2008			2007
Return on average assets		0.17	%		0.14	%		0.15	%		0.48	%		0.75	%
Return on average equity		2.02	%		1.57	%		1.60	%		6.29	%		9.73	%
Equity to average assets ratio		8.39	%		8.83	%		9.15	%		7.63	%		7.73	%

105

UWHARRIE CAPITAL CORP

Board of Directors

W. Stephen Aldridge, III	Charles D. Horne	Cynthia L. Mynatt
President	President	President
Stanly Funeral Home, Inc.	Hornwood, Inc.	Ben Mynatt Buick - GMC
Joe S. Brooks	W. Kenneth Huntley	Timothy J. Propst
Board Chairman	President and Owner	President
Owner and Manager	Huntley Oil & Gas Co., Inc.	Propst Construction Co., Inc.
Brothers Precision Tool Co.
Ronald T. Burleson	Joseph R. Kluttz, Jr.	Susan J. Rourke
Partner	Secretary and Treasurer	President and Owner
Thurman Burleson and Sons Farm	Albemarle Insurance Agency, Inc.	U. S. Land Management Co.
Bill C. Burnside, DDS	Lee Roy Lookabill, Jr.	Donald P. Scarborough
Sole Proprietor	President	President and Broker-Owner
Dental Practice	Anson Real Estate and	Plank Road Realty, Inc.
	Insurance Co., Inc.
Charles F. Geschickter, III	W. Chester Lowder	S. Todd Swaringen
President and	Board Vice Chairman	Partner
Chief Executive Officer	Director of Livestock Program	Beane Swaringen &
JTG Racing, Inc.;	Public Policy Division	Company, PLLC
ST Motorsports, Inc.	NC Farm Bureau Federation, Inc.
Thomas M. Hearne, Jr.	Barry S. Moose	Edward B. Tyson
Retired - Geopavement Engineer	Division Engineer	Retired - Superintendent of
NC Department of Transportation	NC Department of Transportation	Kannapolis City Schools
Executive Officers
Roger L. Dick	Christy D. Stoner	Dana A. Maness
President and	Chief Executive Officer	President
Chief Executive Officer	Strategic Investment	Anson Bank & Trust Co.
Uwharrie Capital Corp	Advisors, Inc.
	Executive Vice President
	Uwharrie Capital Corp
Brendan P. Duffey	Jeffrey M. Talley	W.D. “Bill” Lawhon, Jr.
Executive Vice President and	President	President and
Chief Operating Officer	Strategic Investment	Chief Executive Officer
Uwharrie Capital Corp	Advisors, Inc.	Bank of Stanly
Robert O. Bratton		Patricia K. Horton
Chief Financial Officer		President and
Uwharrie Capital Corp		Chief Executive Officer
		Cabarrus Bank & Trust     Company

EX-21

Exhibit 21

UWHARRIE CAPITAL CORP

SUBSIDIARIES OF THE REGISTRANT

At December 31, 2011

Subsidiaries of Uwharrie Capital Corp	State of Incorporation
Bank of Stanly	North Carolina
Anson Bank & Trust Co.	North Carolina
Cabarrus Bank & Trust Company	North Carolina
Strategic Investment Advisors, Inc.	North Carolina
Uwharrie Mortgage, Inc.	North Carolina
Subsidiaries of Bank of Stanly	State of Incorporation
The Strategic Alliance Corporation	North Carolina
BOS Agency, Inc.	North Carolina
Gateway Mortgage, Inc.	North Carolina

107

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-146595) of Uwharrie Capital Corp of our report dated March 20, 2012, with respect to the consolidated financial statements of Uwharrie Capital Corp and Subsidiaries, which report appears in Uwharrie Capital Corp’s 2011 Annual Report on Form 10-K.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

March 23, 2012

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EX-31.1

Exhibit 31.1

UWHARRIE CAPITAL CORP

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Roger L. Dick, certify that:

1. I have reviewed this report on Form 10-K of Uwharrie Capital Corp (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 20, 2012	By:	/s/ Roger L. Dick
		Roger L. Dick
		Chief Executive Officer

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EX-31.2

Exhibit 31.2

UWHARRIE CAPITAL CORP

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert O. Bratton, certify that:

1. I have reviewed this report on Form 10-K of Uwharrie Capital Corp (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 20, 2012	/s/ Robert O. Bratton
	Robert O. Bratton
	Principal Financial Officer

110

EX-32

Exhibit 32

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)

The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-K filed by Uwharrie Capital Corp (the “Issuer”) for the fiscal year ended December 31, 2011, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: March 20, 2012	/s/ Roger L. Dick
	Roger L. Dick
	Chief Executive Officer
Date: March 20, 2012	/s/ Robert O. Bratton
	Robert O. Bratton
	Principal Financial Officer

111

EX-99.B

Exhibit 99(b)

Principal Executive Officer Certification Pursuant to Section 111(b)(4) of the

Emergency Economic Stabilization Act of 2008, as amended

UWHARRIE CAPITAL CORP - UST 129

I, Roger L. Dick, certify, based on my knowledge, that:

1. The compensation committee of Uwharrie Capital Corp has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Uwharrie Capital Corp;

2. The compensation committee of Uwharrie Capital Corp has identified and limited during any part of the most recently completed fiscal year that was a TARP period, any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Uwharrie Capital Corp and has identified any features of the employee compensation plans that pose risks to Uwharrie Capital Corp and has limited those features to ensure that Uwharrie Capital Corp is not unnecessarily exposed to risks;

3. The compensation committee of Uwharrie Capital Corp has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Uwharrie Capital Corp to enhance the compensation of an employee and has limited any such features;

4. The compensation committee of Uwharrie Capital Corp will certify to the reviews of the SEO compensation plans and employee compensation plans required under (1) and (3) above;

5. The compensation committee of Uwharrie Capital Corp will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Uwharrie Capital Corp; (B) Employee compensation plans that unnecessarily expose Uwharrie Capital Corp to risks; and (C) Employee compensation plans that could encourage the manipulation of reported earnings of Uwharrie Capital Corp to enhance the compensation of an employee;

6. Uwharrie Capital Corp has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

7. Uwharrie Capital Corp has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

8. Uwharrie Capital Corp has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

9. Uwharrie Capital Corp and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of

112

directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

10. Uwharrie Capital Corp will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

11. Uwharrie Capital Corp will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph 8;

12. Uwharrie Capital Corp will disclose whether Uwharrie Capital Corp, the board of directors of Uwharrie Capital Corp, or the compensation committee of Uwharrie Capital Corp has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

13. Uwharrie Capital Corp has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

14. Uwharrie Capital Corp has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Uwharrie Capital Corp and Treasury, including any amendments;

15. Uwharrie Capital Corp has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

16. I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 20, 2012	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

113

EX-99.C

Exhibit 99(c)

Principal Financial Officer Certification Pursuant to Section 111(b)(4)

Emergency Economic Stabilization Act of 2008, as amended

I, Robert O. Bratton, certify, based on my knowledge, that:

1. The compensation committee of Uwharrie Capital Corp has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Uwharrie Capital Corp;

2. The compensation committee of Uwharrie Capital Corp has identified and limited during any part of the most recently completed fiscal year that was a TARP period, any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Uwharrie Capital Corp has identified any features of the employee compensation plans that pose risks to Uwharrie Capital Corp and has limited those features to ensure that Uwharrie Capital Corp is not unnecessarily exposed to risks;

3. The compensation committee of Uwharrie Capital Corp has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Uwharrie Capital Corp to enhance the compensation of an employee and has limited any such features;

4. The compensation committee of Uwharrie Capital Corp will certify to the reviews of the SEO compensation plans and employee compensation plans required under (1) and (3) above;

5. The compensation committee of Uwharrie Capital Corp will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Uwharrie Capital Corp; (B) Employee compensation plans that unnecessarily expose Uwharrie Capital Corp to risks; and (C) Employee compensation plans that could encourage the manipulation of reported earnings of Uwharrie Capital Corp to enhance the compensation of an employee;

6. Uwharrie Capital Corp has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

7. Uwharrie Capital Corp has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

8. Uwharrie Capital Corp has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

9. Uwharrie Capital Corp and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

114

10. Uwharrie Capital Corp will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

11. Uwharrie Capital Corp will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph 8;

12. Uwharrie Capital Corp will disclose whether Uwharrie Capital Corp, the board of directors of Uwharrie Capital Corp, or the compensation committee of Uwharrie Capital Corp has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

13. Uwharrie Capital Corp has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

14. Uwharrie Capital Corp has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Uwharrie Capital Corp and Treasury, including any amendments;

15. Uwharrie Capital Corp has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

16. I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 20, 2012	By:	/s/ Robert O. Bratton
		Robert O. Bratton
		Chief Financial Officer

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XML

Fair Values Of Financial Instruments And Interest Rate Risk

12 Months Ended

Dec. 31, 2011

Fair Values Of Financial Instruments And Interest Rate Risk [Abstract]

Fair Values Of Financial Instruments And Interest Rate Risk

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at December 31, 2011 and 2010, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company's financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2011 and 2010:

	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and cash equivalents	$	28,687	$	28,687	$	13,624	$	13,630
Securities available for sale		88,661		88,661		96,395		96,395
Loans held for investment, net		359,860		374,636		387,769		392,017
Loans held for sale		1,958		1,958		6,286		6,286
FHLB Stock and FRB Stock		3,289		3,289		4,031		4,031
Bank-owned life insurance		6,171		6,171		5,975		5,975
Mortgage servicing rights		2,128		2,494		2,134		2,522
Accrued interest receivable		2,084		2,084		2,408		2,408
Financial Liabilities
Deposits	$	431,338	$	430,641	$	434,033	$	439,298
Short-term borrowings		20,791		20,791		20,482		20,482
Long-term debt		25,233		25,894		34,061		35,625
Accrued interest payable		301		301		342		342

The carrying amount of cash and cash equivalents and accrued interest, approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. It is not practicable to determine fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability so it is presented at its carrying value. The carrying amount of bank-owned life insurance is the current cash surrender value. Fair value for mortgage servicing assets is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

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

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

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

• Borrowings - The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analysis using offered market rates. The fair value of the unsecured debt does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

At December 31, 2011, 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 13.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010:

	December 31, 2011
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	33,532	$	33,532	$	—	$	—
US Gov't		19,997		—		19,997		—
Mortgage-backed securities and CMO's		24,263		—		24,263		—
State and political subdivisions		10,869		—		10,869		—
Total assets at fair value	$	88,661	$	33,532	$	55,129	$	—
Total liabilities at fair value	$	—	$		$	—	$	—
	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	51,148	$	51,148	$	—	$	—
US Gov't		25,463		—		25,463		—
Mortgage-backed securities and CMO's		8,900		—		8,900		—
State and political subdivisions		10,884		—		10,884		—
Total assets at fair value	$	96,395	$	51,148	$	45,247	$	—
Total liabilities at fair value	$	—	$		$	—	$	—

Prices for US Treasury are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the 'Level 1 input' column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the 'Level 2 input' column. Prices for non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the 'Level 3 input' column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2011 and December 31, 2010:

	December 31, 2011
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	7,074	$	—	$	—	$	7,074
Loans held for sale		1,958		—		1,958		—
Other real estate owned		1,464		—		—		1,464
Total assets at fair value	$	10,496	$	—	$	1,958	$	8,538
Total liabilities at fair value	$	—	$	—	$	—	$	—
	December 31, 2010
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	12,265	$	—	$	—	$	12,265
Loans held for sale		6,286		—		6,286		—
Other real estate owned		275		—		—		275
Total assets at fair value	$	18,826	$	—	$	6,286	$	12,540
Total liabilities at fair value	$	—	$	—	$	—	$	—

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

Interest Rate Risk

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

XML

Investment Securities

12 Months Ended

Dec. 31, 2011

Investment Securities [Abstract]

Investment Securities

Note 2 - Investment Securities

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

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	32,073	$	1,459	$	—	$	33,532
U.S. Government agencies		19,142		855		—		19,997
GSE - Mortgage-backed securities and CMO's		24,016		332		85		24,263
State and political subdivisions		10,071		798		—		10,869
Total securities available for sale	$	85,302	$	3,444	$	85	$	88,661
December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	51,622	$	746	$	1,220	$	51,148
U.S. Government agencies		24,862		766		165		25,463
GSE - Mortgage-backed securities and CMO's		8,655		294		49		8,900
State and political subdivisions		10,725		267		108		10,884
Total securities available for sale	$	95,864	$	2,073	$	1,542	$	96,395

At both December 31, 2011 and 2010, the Company owned Federal Reserve stock reported at cost of $802,850 and 778,850 respectively and is included in other assets. Also at December 31, 2011 and 2010, the Company owned Federal Home Loan Bank Stock (FHLB) of $2.5 million and $3.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company's membership and borrowings with these banks.

Results from sales and calls of securities available for sale for the years ended December 31, 2011, 2010 and 2009 are as follows:

	2011		2010			2009
	(dollars in thousands)
Gross proceeds from sales and calls	$	25,568	$	40,623		$	9,535
Realized gains from sales	$	933	$	1,960		$	219
Realized losses from sales		—		(476	)		(930	)
Net realized gains (losses)	$	933	$	1,484		$	(711	)

At December 31, 2011, 2010 and 2009 securities available for sale with a carrying amount of $37.7 million, $40.7 million and $11.4 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011 and 2010. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2011, the unrealized losses related to three mortgage backed securities and at December 31, 2010 related to six U.S. Treasury notes, two U.S. Government Agencies, three mortgage backed securities and eight North Carolina municipal bonds.

	Less than 12 Months				12 Months or More				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Gov't agencies		—		—		—		—		—		—
Mortgage-backed securities and CMO's		9,734		85		—		—		9,734		85
State and political subdivisions		—		—		—		—		—		—
	$	9,734	$	85	$	—	$	—	$	9,734	$	85
	Less than 12 Months				12 Months or More				Total
December 31, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	26,138	$	1,220	$	—	$	—	$	26,138	$	1,220
U.S. Gov't agencies		5,736		165		—		—		5,736		165
Mortgage-backed securities and CMO's		2,900		49		—		—		2,900		49
State and political subdivisions		4,522		108		—		—		4,522		108
	$	39,296	$	1,542	$	—	$	—	$	39,296	$	1,542

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2011, the Company did not intend to sell and was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following table shows contractual maturities of the investment portfolio as of December 31, 2011:

	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within one year	$	2,412	$	2,454
Due after one but within five years		25,559		26,839
Due after five but within ten years		31,711		33,354
Due after ten years		1,604		1,751
Mortgage backed securities		24,016		24,263
	$	85,302	$	88,661

The mortgage-based securities are shown separately as they are not due at a single maturity date.

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

	2011		2010
	(dollars in thousands)
Balance, beginning of the period	$	—	$	1,807
Impairment losses recognized during the year		—		—
Realized losses from sales		—		(1,807	)
Balance, end of year	$	—	$	—

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Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Significant Accounting Policies [Abstract]

Significant Accounting Policies

Note 1 - Significant Accounting Policies

Nature of Business

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

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

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

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

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

On August 4, 2000, Stanly acquired another subsidiary, Gateway Mortgage, Inc. ("Gateway"), a mortgage origination company. This company is currently inactive and does not affect the consolidated financials.

On April 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 Stanly's subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The allowance if any would not have a material impact on the financial statements.

Loans

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

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

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis 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, generally a minimum of six months of sustained performance is required.

Allowance for Loan Losses

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

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

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

Troubled debt restructure loans (TDR) are considered to be impaired loans and are individually evaluated for impairment.

Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment is such a loan is deemed impaired.

In the third quarter of 2010, the Company upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the new allowance model. The loans that are impaired and included in the specific reserve are excluded from these new calculations.

Mortgage Servicing Rights

The Company capitalizes mortgage 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, and costs related to the improvement of the property are capitalized if the current fair value will allow it, if not these costs are expensed also. 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.

Restricted Stock

As a requirement for membership, the banks invest in the stock of the Federal Home Loan Bank of Atlanta ("FHLB") and Federal Reserve Bank ("FRB"). These investments are carried at cost. Due to the redemption provisions of these investments, the Company estimated that fair value approximates cost and that this investment was not impaired.

Goodwill

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

Stock-Based Compensation

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

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The tax returns for the Company are subject to audit for the 2008 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.

Fair Value of Financial Instruments

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

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

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

Prices for US Treasury are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the 'Level 1 input' column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the 'Level 2 input' column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the 'Level 3 input' column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the underlying collateral is further impaired below the appraised value the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional write downs, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

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

Mortgage servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

Comprehensive Income

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

As of December 31, 2011 and December 31, 2010, total accumulated other comprehensive income was $2.2 million and $335,000, respectively.

Earnings per Common Share

The Company had stock options outstanding of 123,570, 180,571 and 280,715 at December 31, 2011, 2010 and 2009 respectively. All of these options were anti-dilutive.

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

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

	2011			2010			2009
Weighted average number of common shares used in computing basic net income per common share		7,593,969			7,593,969			7,593,969
Effect of ESOP shares		(126,573	)		(108,596	)		(119,829	)
Adjusted weighted average number of common shares used in computing basic net income per common share		7,467,396			7,485,373			7,474,140
Effect of dilutive stock options		—			—			—
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		7,467,396			7,485,373			7,474,140

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, "Fair Value Measurements." This update adds a new requirement to disclose transfers in and out of level 1 and level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for level 1 and level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for level 1 and level 2 transfers and the expanded qualitative disclosures, had no impact on the Company's financial position, results of operations, and EPS. The Company adopted the level 3 disclosure requirements in the first quarter of 2011 and it had no impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued ASU 2010-20, an update to ASC 310 "Receivables". The update to ASC 310 requires entities to provide disclosures designed to facilitate financial statement users' evaluation of (i) the nature of credit risk inherent in the entity's portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company's financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company's financial statements beginning on January 1, 2011. The Company has adopted this update and included the disclosure in the notes to the financial statements.

In April 2011, the FASB issued ASU No. 2011-02, an update to ASC 310 "Receivables". The update to ASC 310 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a material impact on the Company's financial statements.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS. The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption The adoption of this statement did not have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, "Comprehensive Income." This update requires that all nonowner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company's financial statements.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350 "Intangibles - Goodwill and Other." This update gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Company's financial statements.

From time to time the FASB issues exposure drafts of proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to 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 2010 and 2009 financial statements have been reclassified to conform to the 2011 presentation. The reclassifications had no effect on net income or shareholders' equity as previously reported.

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and due from banks	$ 7,487	$ 4,948
Interest-earning deposits with banks	21,200	8,676
Securities available for sale, at fair value	88,661	96,395
Loans held for sale	1,958	6,286
Loans:
Loans held for investment	366,675	387,769
Less allowance for loan losses	(6,815)	(9,067)
Net loans held for investment	359,860	378,702
Premises and equipment, net	15,076	14,554
Interest receivable	2,084	2,408
Federal Home Loan Bank stock	2,486	3,252
Bank owned life insurance	6,171	5,975
Goodwill	987	987
Other real estate owned	10,258	2,022
Prepaid assets	1,347	2,088
Other assets	9,327	9,133
Total assets	526,902	535,426
LIABILITIES
Demand noninterest-bearing	62,339	54,837
Interest checking and money market accounts	185,539	187,493
Savings deposits	39,273	37,624
Time deposits, $100,000 and over	58,274	59,431
Other time deposits	85,913	94,648
Total deposits	431,338	434,033
Short-term borrowed funds	20,791	20,482
Long-term debt	25,233	34,061
Interest payable	301	342
Other liabilities	3,636	3,015
Total liabilities	481,299	491,933
Off balance sheet items, commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Discount on preferred stock	(200)	(300)
Common stock, $1.25 par value: 20,000,000 shares authorized; 7,593,929 shares issued and outstanding	9,492	9,492
Additional paid-in capital	14,010	14,034
Unearned ESOP compensation	(772)	(692)
Undivided profits	10,379	10,124
Accumulated other comprehensive income	2,194	335
Total shareholders' equity	45,603	43,493
Total liabilities and shareholders' equity	526,902	535,426
Preferred Stock Series A [Member]
SHAREHOLDERS' EQUITY
Preferred stock	10,000	10,000
Preferred Stock Series B [Member]
SHAREHOLDERS' EQUITY
Preferred stock	$ 500	$ 500

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Consolidated Statements Of Changes In Shareholders' Equity (USD $) In Thousands, except Share data	Preferred Stock Series A [Member]	Preferred Stock Series B [Member]	Discount On Preferred Stock [Member]	Common Stock [Member]	Additional Paid-In Capital [Member]	Unearned ESOP Compensation [Member]	Undivided Profits [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Dec. 31, 2008	$ 10,000	$ 500	$ (500)	$ 9,492	$ 14,019	$ (736)	$ 10,008	$ (1,550)	$ 41,233
Balance, shares at Dec. 31, 2008				7,593,929
Net income							690		690
Other comprehensive income								2,563	2,563
Release of ESOP shares						69			69
Stock compensation expense					11				11
Record preferred stock dividend and discount accretion			100				(642)		(542)
Balance at Dec. 31, 2009	10,000	500	(400)	9,492	14,030	(667)	10,056	1,013	44,024
Balance, shares at Dec. 31, 2009				7,593,929
Net income							713		713
Other comprehensive income								(678)	(678)
Release of ESOP shares						75			75
Increase in ESOP notes receivable						(100)			(100)
Stock compensation expense					4				4
Record preferred stock dividend and discount accretion			100				(645)		(545)
Balance at Dec. 31, 2010	10,000	500	(300)	9,492	14,034	(692)	10,124	335	43,493
Balance, shares at Dec. 31, 2010				7,593,929					7,593,929
Net income							900		900
Other comprehensive income								1,859	1,859
Release of ESOP shares					(28)	81			53
Increase in ESOP notes receivable						(161)			(161)
Stock compensation expense					4				4
Record preferred stock dividend and discount accretion			100				(645)		(545)
Balance at Dec. 31, 2011	$ 10,000	$ 500	$ (200)	$ 9,492	$ 14,010	$ (772)	$ 10,379	$ 2,194	$ 45,603
Balance, shares at Dec. 31, 2011				7,593,929					7,593,929

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Shareholders' Equity And Regulatory Matters

12 Months Ended

Dec. 31, 2011

Shareholders' Equity And Regulatory Matters [Abstract]

Shareholders' Equity And Regulatory Matters

Note 15 - Shareholders' Equity and Regulatory Matters

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

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

	Actual					Minimum For Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
			(Dollars in thousands)
December 31, 2011
Total Capital to Risk
Weighted Assets:
Consolidated	$	58,319		15.4	%	$	30,364		8.0	%	$	N/A		—	%
Bank of Stanly		33,376		13.3	%		20,035		8.0	%		25,044		10.0	%
Anson Bank and Trust		6,170		17.0	%		2,904		8.0	%		3,630		10.0	%
Cabarrus Bank and Trust		12,641		14.3	%		7,062		8.0	%		8,828		10.0	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		42,422		11.2	%		15,182		4.0	%		N/A		—	%
Bank of Stanly		30,231		12.1	%		10,018		4.0	%		15,026		6.0	%
Anson Bank and Trust		5,710		15.7	%		1,452		4.0	%		2,178		6.0	%
Cabarrus Bank and Trust		11,533		13.1	%		3,531		4.0	%		5,297		6.0	%
Tier I Capital to
Average Assets:
Consolidated		42,422		8.0	%		21,209		4.0	%		N/A		—	%
Bank of Stanly		30,231		8.8	%		13,693		4.0	%		17,117		5.0	%
Anson Bank and Trust		5,710		10.1	%		2,252		4.0	%		2,815		5.0	%
Cabarrus Bank and Trust		11,533		9.0	%		5,105		4.0	%		6,381		5.0	%

	Actual					Minimum For Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
			(Dollars in thousands)
December 31, 2010
Total Capital to Risk
Weighted Assets:
Consolidated	$	55,534		14.4	%	$	30,793		8.0	%	$	N/A		—	%
Bank of Stanly		32,520		12.6	%		20,590		8.0	%		25,738		10.0	%
Anson Bank and Trust		5,276		13.8	%		3,050		8.0	%		3,812		10.0	%
Cabarrus Bank and Trust		12,697		13.3	%		7,623		8.0	%		9,529		10.0	%
Tier I Capital to Risk
Weighted Assets:
Consolidated		42,171		11.0	%		15,396		4.0	%		N/A		—	%
Bank of Stanly		29,263		11.4	%		10,295		4.0	%		15,443		6.0	%
Anson Bank and Trust		4,793		12.6	%		1,525		4.0	%		2,287		6.0	%
Cabarrus Bank and Trust		11,500		12.1	%		3,811		4.0	%		5,717		6.0	%
Tier I Capital to
Average Assets:
Consolidated		42,171		7.8	%		21,615		4.0	%		N/A		—	%
Bank of Stanly		29,263		8.4	%		13,956		4.0	%		17,445		5.0	%
Anson Bank and Trust		4,793		8.4	%		2,274		4.0	%		2,842		5.0	%
Cabarrus Bank and Trust		11,500		8.9	%		5,184		4.0	%		6,480		5.0	%

As of December 31, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized all of the Company's subsidiary banks as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorizations.

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

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

The Warrant Preferred also qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid dividends. It is the Company's intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years. At December 31, 2011 the remaining discount was $200,000.

On December 31, 2008, the Company entered into agreements with its subsidiary banks to sell Fixed Rate Noncumulative Perpetual Preferred Stock to the Company to provide an avenue for investing portions of the funds received from Company's issuance of preferred stock at the subsidiary bank level. At December 31, 2011, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.8 million in Anson and $3.0 million in Cabarrus.

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

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

For the reserve maintenance period in effect at December 31, 2011, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $2.0 million as reserves on deposit liabilities.

Stock Repurchase Program

On February 21, 1995, the Company's Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company's common stock for the primary purpose of providing liquidity to its shareholders. There were no shares repurchased during 2010 or 2011.

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

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Employee And Director Benefit Plans

12 Months Ended

Dec. 31, 2011

Employee And Director Benefit Plans [Abstract]

Employee And Director Benefit Plans

Note 17 - Employee and Director Benefit Plans

Employees' Savings Plus and Profit Sharing Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day if calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

The Company's annual contribution to the plan was $306,673 in 2011, $296,466 in 2010 and $210,884 in 2009, determined as follows:

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

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

Directors' Deferred Compensation Plan

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

Employee Stock Ownership Plan

The Company established an Employee Stock Ownership Plan ("ESOP") to benefit all qualified employees. The ESOP purchased 293,216 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2011, the outstanding balance of the loan is $511,237 and is presented as a reduction of shareholders' equity.

All the debt payments are made on the loans, shares associated with those debt payments are released to the ESOP and allocated among active participants on the basis of compensation in the year of allocation. Benefits vest 100% as they are allocated to participants. Dividends on unallocated shares may be used by the ESOP to repay the loan to the Company and are not reported as dividends in the financial statements. Dividends on allocated or committed to be allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.

The Company established a $500,000 line of credit to the ESOP in the third quarter of 2010 for the purpose of purchasing shares for the ESOP plan. Advances of $260,541 have been made under this line of credit, and a total of 79,434 unallocated shares have been purchased from the open market from the advance proceeds and pledged as collateral. The unused balance of the line of credit at December 31, 2011 was $239,459. This amount is available for future advances to purchase stock for the ESOP plan. At December 31, 2011, the outstanding balance of the loan is $260,541 and is presented as a reduction of shareholders' equity.

During 2011 the Company continued to expense approximately 2% of salaries as a contribution to the ESOP Plan the same as 2010 compared to 3% contributed in 2009. The reduction in the percentage contributed was due to an increase in contributions to the Employees' Savings Plus and Profit Sharing Plan which was increased from a maximum match of 3% to a maximum match of 4% of associate contributions. Expenses of $219,657, $229,011 and $350,068 during the years ended December 31, 2011, 2010 and 2009, respectively, were incurred in connection with the ESOP.

At December 31, 2011, 409,129 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP's participants for purposes of computing earnings per share. There were 160,883 shares unallocated with a fair value of approximately $519,652 at December 31, 2011.

Supplemental Executive Retirement Plan

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

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants' account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.

The plan is structured as a defined contribution plan and the Company's expected annual funding contribution for the participants has been calculated through the participant's expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to attainment of retirement age.

During 2011, 2010 and 2009 a provision of $266,800, $266,800 and $500,800, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation deferred under the plan amounts to $2.0 million and $1.7 million at December 31, 2011 and 2010, respectively.

Split-Dollar Life Insurance

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers' beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2011 and 2010, the expense income associated with these policies was $53,938 and $(12,322), respectively.

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash flows from operating activities
Net income	$ 900	$ 713	$ 690
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation	838	815	780
Net amortization of security premiums/discounts	865	412	134
Impairment of securities available for sale			1,807
Net amortization of mortgage servicing rights	670	869	868
Impairment of foreclosed real estate	212	125	78
Provision for loan losses	3,456	4,919	1,732
Deferred income taxes	1,000	(1,091)	(737)
Stock compensation	4	4	11
Net realized (gains)loss on sales / calls available for sale securities	(933)	(1,484)	711
Income from mortgage loan sales	(1,806)	(3,172)	(3,436)
Proceeds from sales of loans held for sale	70,251	110,374	144,761
Origination of loans held for sale	(64,116)	(111,973)	(142,727)
(Gain) loss on sale of premises, equipment and other assets	13	71	(1)
Loss on nonmarketable securities			172
Increase in cash surrender value of life insurance	(196)	(261)	(203)
Loss on sales of foreclosed real estate	68	332	36
Release of ESOP Shares	53	75	69
Net change in interest receivable	324	(331)	(50)
Net change in other assets	(1,910)	(532)	(3,652)
Net change in interest payable	(41)	(54)	(106)
Net change in other liabilities	621	(54)	714
Net cash provided (used) by operating activities	10,273	(243)	1,651
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale	38,648	53,013	30,353
Purchase of securities available for sale	(28,020)	(71,430)	(36,208)
Net (increase) decrease in loans	6,259	(34,866)	(15,598)
Proceeds from sale of premises, equipment and other assets			1
Purchase of premises and equipment	(1,373)	(1,725)	(3,298)
Proceeds from sales of foreclosed real estate	611	733	1,243
Investment in other assets	(181)	(240)	(1,089)
Net (increase) decrease in Federal Home Loan Bank stock	766	(51)	(917)
Net cash provided (used) by investing activities	16,710	(54,566)	(25,513)
Cash flows from financing activities
Net increase (decrease) in deposit accounts	(2,695)	57,259	23,147
Net increase (decrease) in short-term borrowed funds	309	(6,458)	4,691
Net increase (decrease) in long-term debt	(10,060)	4,942	(5,859)
Net proceeds from issuance of junior subordinated debt	1,962	2,476
Repayment of junior subordinated debt	(730)
Increase in unearned ESOP compensation	(161)	(100)
Dividend on preferred stock	(545)	(545)	(542)
Net cash provided (used) by financing activities	(11,920)	57,574	21,437
Increase (decrease) in cash and cash equivalents	15,063	2,765	(2,425)
Cash and cash equivalents, beginning of year	13,624	10,859	13,284
Cash and cash equivalents, end of year	28,687	13,624	10,859
Supplemental disclosures of cash flow information
Interest paid	4,778	6,005	7,802
Income taxes paid	220	1,274	1,558
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax	1,859	(678)	2,563
Loans transferred to foreclosed real estate	9,127	2,148	1,882
Company financed sales of other real estate owned		2,450
Mortgage servicing rights capitalized	679	1,113	1,465
Preferred stock dividend accrued	$ (68)	$ (68)	$ (68)

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Consolidated Balance Sheets (Parenthetical) (USD $)	Dec. 31, 2011	Dec. 31, 2010
Preferred stock, no par value
Preferred stock, shares authorized	10,000,000	10,000,000
Common stock, par value	$ 1.25	$ 1.25
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	7,593,929	7,593,929
Common stock, shares outstanding	7,593,929	7,593,929
Preferred Stock Series A [Member]
Preferred stock, shares issued	10,000	10,000
Preferred stock, shares outstanding	10,000	10,000
Preferred Stock Series B [Member]
Preferred stock, shares issued	500	500
Preferred stock, shares outstanding	500	500

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Short-Term Borrowed Funds

12 Months Ended

Dec. 31, 2011

Short-Term Borrowed Funds[Abstract]

Short-Term Borrowed Funds

Note 10 - 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 2011 and 2010:

	2011					2010
	Amount		Rate			Amount		Rate
	(dollars in thousands)
At year-end
Master notes and other short term borrowing	$	7,732		0.94	%	$	10,423		0.94	%
Notes payable		59		3.80	%		59		3.82	%
Short-term advances from FHLB		13,000		2.04	%		10,000		4.42	%
	$	20,791		1.70	%	$	20,482		2.64	%
	2011					2010
	Amount		Rate			Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	4		0.74	%	$	7		1.17	%
Master notes and other short term borrowing		9,556		1.13	%		11,174		0.95	%
Notes payable		59		3.82	%		58		3.76	%
Short-term advances from FHLB		14,629		1.78	%		15,272		3.83	%
	$	24,248		1.46	%	$	26,511		2.62	%

	2011		2010
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	—	$	300
Master notes and other short term borrowing		11,110		13,454
Notes payable		59		58
Short-term advances from FHLB		20,450		23,920

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place and borrowings secured by the Uwharrie Loan Pool.

The subsidiary banks have combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $43.9 million at December 31, 2011.

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Mar. 19, 2012	Jun. 30, 2011
Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Entity Filer Category	Smaller Reporting Company
Entity Registrant Name	UWHARRIE CAPITAL CORP
Entity Central Index Key	0000898171
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		7,593,929
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 27,917,811

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Long-Term Debt

12 Months Ended

Dec. 31, 2011

Long-Term Debt [Abstract]

Long-Term Debt

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $64.6 million with remaining availability of $25.9 million at December 31, 2011. The long-term advances under this line amounted to $14.0 million and $24.0 million at December 31, 2011 and 2010, respectively. Interest rates ranged from 0.44% to 4.08% in 2011 and from 1.15% to 4.46% in 2010. The subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $11.7 million at December 31, 2011.

During the second and third quarters of 2008, the Company began a private placement of up to 7,500 fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities have a final maturity date of June 30, 2015 and may be redeemed by the Company after June 30, 2010. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $7.4 million that was outstanding at December 31, 2010. Once the final maturity drops under five years, the Company must impose a twenty percent reduction per year of the amount of the proceeds from the sale of these securities that is eligible to be counted as Tier 2 capital. At December 31, 2010 $1.5 million of the $7.4 million was excluded as Tier 2 capital. These securities were redeemed on March 31, 2011 and replaced with a new issue for subordinated debt securities discussed below.

During the second and third quarters of 2010, the Company began a private placement of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities have a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $11.1 million that was outstanding at December 31, 2011.

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 $65,621 at December 31, 2011 down from $74,456 at December 31, 2010.

On May 13, 2009, the Company executed a note payable in the amount of $200,000 for the purchase of existing leased office space. The note bears interest at 3.43% and is to be paid in four equal annual payments of $50,000. The outstanding balance of this note was $100,000 and $150,000 at December 31, 2011 and 2010 respectively.

As of December 31, 2011, the scheduled maturities of these advances and notes payable are as follows:

Year ending December 31,
(dollars in thousands)
2013	$	12,560
2014		1,510
2015		11
2016		12
2017		13
Thereafter		11,127
Total	$	25,233

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Consolidated Statements Of Income (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Interest Income
Loans, including fees	$ 21,609	$ 21,616	$ 21,246
Investment securities:
US Treasury	742	612	12
US Government agencies and corporations	1,035	1,896	3,106
State and political subdivisions	371	319	632
Interest-earning deposits with banks and federal funds sold	65	44	66
Total interest income	23,822	24,487	25,062
Interest Expense
Interest checking and money market accounts	785	971	838
Savings deposits	286	327	255
Time deposits $100,000 and over	1,106	1,192	1,980
Other time deposits	1,138	1,684	2,836
Short-term borrowed funds	354	693	316
Long-term debt	1,068	1,084	1,472
Total interest expense	4,737	5,951	7,697
Net interest income	19,085	18,536	17,365
Provision for loan losses	3,456	4,919	1,732
Net interest income after provision for loan losses	15,629	13,617	15,633
Noninterest Income
Service charges on deposit accounts	1,837	2,219	2,360
Other service fees and commissions	3,409	2,883	2,273
Gain (loss) on sale of securities	933	1,484	(711)
Loss on nonmarketable securities			(172)
Loss on securities with other-than-temporary impairment			(1,807)
Portion of loss recognized in other comprehensive income
Net impairment recognized in income			(1,807)
Income from mortgage loan sales	1,806	3,172	3,436
Other income	271	140	445
Total noninterest income	8,256	9,898	5,824
Noninterest Expense
Salaries and employee benefits	12,121	11,648	11,527
Net occupancy expense	1,165	1,193	1,071
Equipment expense	758	769	702
Data processing costs	858	853	792
Office supplies and printing	337	384	335
Foreclosed real estate expense	489	387	219
Professional fees and services	1,488	1,230	968
Marketing and donations	769	1,291	746
Electronic banking expense	875	811	728
Software amortization and maintenance	573	542	470
FDIC insurance	750	795	958
Other noninterest expense	2,606	2,748	2,414
Total noninterest expense	22,789	22,651	20,930
Income before income taxes	1,096	864	527
Income taxes	196	151	(163)
Net income	900	713	690
Net income	900	713	690
Dividends on preferred stock	(645)	(645)	(642)
Net Income available to common shareholders	$ 255	$ 68	$ 48
Net income per common share
Basic	$ 0.03	$ 0.01	$ 0.01
Diluted	$ 0.03	$ 0.01	$ 0.01
Weighted average common shares outstanding
Basic	7,467,396	7,485,373	7,474,140
Diluted	7,467,396	7,485,373	7,474,140

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Troubled Debts Restructures

12 Months Ended

Dec. 31, 2011

Troubled Debts Restructures [Abstract]

Troubled Debts Restructures

Note 5 - Troubled Debts Restructures

A modification of a loan constitutes a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the other category are TDR's with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as a TDR are typically already on nonaccrual status and partial chargeoffs may have in some cases already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

For the twelve months ended December 31, 2011, the following table presents a breakdown of the types of concessions made by loan class:

	Twelve months ended December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(dollars in thousands)
Below market interest rate:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		1		210		208
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		1	$	210	$	208
Other:
Commercial		1	$	43	$	34
Real estate - commercial		1		97		96
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		10		1,223		1,203
Home equity		—		—		—
Consumer loans		4		113		93
Other loans		—		—		—
		16	$	1,476	$	1,426
Total		17	$	1,686	$	1,634

The following table presents loans that were modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the twelve months ended December 31, 2011:

	Twelve months ended December 31, 2011
	Number of Loans		Recorded Investment
	(dollars in thousands)
Below market interest rate:
Commercial		—	$	—
Real estate - commercial		—		—
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		1		208
Home Equity loans		—		—
Consumer loans		—		—
Other loans		—		—
		1	$	208
Other:
Commercial		—	$	—
Real estate - commercial		1		34
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		4		627
Home Equity loans		—		—
Consumer loans		3		76
Other loans		—		—
		8	$	737
Total		9	$	945

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2011:

	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
Below market interest rate		—	$	—		1	$	208		—	$	—		—	$	—
Other Loans		—		—		14		1,176		2		250		—		—
Total		—	$	—		15	$	1,384		2	$	250		—	$	—

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Allowance For Loan Losses

12 Months Ended

Dec. 31, 2011

Allowance For Loan Losses [Abstract]

Allowance For Loan Losses

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2011, 2010 and 2009 are presented below:

	2011			2010			2009
	(dollars in thousands)
Balance, beginning of year	$	9,067		$	5,276		$	4,361
Charge-offs		(5,836	)		(1,189	)		(871	)
Recoveries		133			44			54
Other		(5	)		17			—
Provision charged against income		3,456			4,919			1,732
Balance, end of year	$	6,815		$	9,067		$	5,276

The following tables is the breakout of allowance for loss by loan class at December 31, 2011 and 2010:

December 31, 2011

	Beginning Balance		Provisions			Other			Chargeoffs			Recoveries		Ending Balance
			(dollars in thousands)
Commercial	$	966	$	493		$	—		$	(336	)	$	4	$	1,127
Real estate - commercial		2,240		335			—			(1,123	)		7		1,459
Other real estate construction		2,157		1,119			—			(2,958	)		—		318
Real estate construction		33		215			—			(15	)		6		239
Real estate - residential		1,658		697			—			(383	)		11		1,983
Home equity		971		596			—			(631	)		5		941
Consumer loan		984		(27	)		—			(390	)		100		667
Other loans		58		28			(5	)		—			—		81
Total	$	9,067	$	3,456		$	(5	)	$	(5,836	)	$	133	$	6,815

December 31, 2010

	Beginning Balance		Provisions			Other		Chargeoffs			Recoveries		Ending Balance
			(dollars in thousands)
Commercial	$	449	$	569		$	4	$	(59	)	$	3	$	966
Real estate - commercial		1,541		1,216			10		(527	)		—		2,240
Other real estate construction		1,205		952			—		—			—		2,157
Real estate construction		168		(58	)		—		(78	)		1		33
Real estate - residential		1,264		614			—		(222	)		2		1,658
Home equity		213		854			—		(97	)		1		971
Consumer loan		436		714			3		(206	)		37		984
Other loans		—		58			—		—			—		58
Total	$	5,276	$	4,919		$	17	$	(1,189	)	$	44	$	9,067

For the period ending December 31, 2009, the allowance for loan losses totaled $1.205M in the "other real estate construction" category. Approximately 62% of the amount reserved was allotted to one substandard relationship. During the course of 2010, additional provisions were reserved for this relationship as real estate values continued to face downward pressure. In addition, another large relationship was classified as impaired and reserves were allocated for a potential shortfall based on updated appraised value. For the period ending December 31, 2010, these two relationships accounted for 79% of the amount reserved in the allowance for loan losses for the "other real estate construction" category.

In April 2011, the Company moved one of the relationships to foreclosed real estate, and recorded a chargeoff to the allowance in the amount of $1.18M. This charge reduced the overall size of the allowance by approximately 36%. Subsequently, the second relationship was moved to foreclosed real estate, resulting in a further decrease in the allowance. These two relationships represent $2.562M, or 87% of the total amount that was charged off in the "other real estate construction" category for the year ending December 31, 2011. Both of these relationships were external participations on out-of-market properties. These two relationships constituted the largest portion of the Company's external participations in this loan category, and as a result, management feels it has substantially reduced the overall risk of the portfolio by recognizing a charge to the allowance and moving the properties to foreclosed real estate. The Company also continues to reduce exposure to the "other real estate construction" category, and saw a 40% decline in the overall size of the portfolio during the year.

The following tables shows period-end loans net of charge offs and reserve balances by loan class both individually and collectively evaluated for impairment at December 31, 2011 and 2010:

December 31, 2011

	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
			(dollars in thousands)
Commercial	$	578	$	1,980	$	549	$	43,927	$	1,127	$	45,907
Real estate - commercial		452		12,888		1,007		102,056		1,459		114,944
Other real estate construction		107		4,014		211		27,587		318		31,601
Real estate construction		202		1,095		37		4,448		239		5,543
Real estate - residential		1,001		11,877		982		89,970		1,983		101,847
Home equity		124		993		817		50,420		941		51,413
Consumer loan		119		242		548		14,468		667		14,710
Other loans		—		—		81		602		81		602
Total	$	2,583	$	33,089	$	4,232	$	333,478	$	6,815	$	366,567

December 31, 2010

	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
			(dollars in thousands)
Commercial	$	399	$	1,439	$	567	$	50,240	$	966	$	51,679
Real estate - commercial		1,384		20,321		856		84,802		2,240		105,123
Other real estate construction		1,818		10,355		339		41,915		2,157		52,270
Real estate construction		—		950		33		3,382		33		4,332
Real estate - residential		762		8,884		896		94,897		1,658		103,781
Home equity		136		1,065		835		50,969		971		52,034
Consumer loan		132		241		852		17,480		984		17,721
Other loans		—		—		58		739		58		739
Total	$	4,631	$	43,255	$	4,436	$	344,424	$	9,067	$	387,679

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

December 31, 2011

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	212	$	329	$	541	$	45,366	$	45,907	$	—
Real estate - commercial		2,396		2,742		5,138		109,806		114,944		—
Other real estate construction		358		2,084		2,442		29,159		31,601		—
Real estate construction		—		—		—		5,543		5,543		—
Real estate - residential		2,341		2,441		4,782		97,065		101,847		—
Home equity		298		255		553		50,860		51,413		—
Consumer loan		208		11		219		14,491		14,710		—
Other loans		—		—		—		602		602		—
Total	$	5,813	$	7,862	$	13,675	$	352,892	$	366,567	$	—

December 31, 2010

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	666	$	501	$	1,167	$	50,512	$	51,679	$	—
Real estate - commercial		1,728		8,702		10,430		94,693		105,123		—
Other real estate construction		206		7,975		8,181		44,089		52,270		—
Real estate 1 - 4 family construction		—		500		500		3,832		4,332		—
Real estate - residential		1,648		2,337		3,985		99,796		103,781		397
Home equity		110		75		185		51,849		52,034		—
Consumer loans		267		46		313		17,408		17,721		10
Other loans		—		—		—		739		739		—
Deferred cost / fees		—		—		—		90		90		—
Total	$	4,625	$	20,136	$	24,761	$	363,008	$	387,769	$	407

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off.

The composition of nonaccrual loans by class as of December 31, 2011 and 2010 is as follows:

	2011		2010
	(dollars in thousands)
Commercial	$	329	$	501
Real estate - commercial		2,742		8,702
Other real estate construction		2,084		7,975
Real estate 1 - 4 family construction		—		500
Real estate - residential		2,441		1,940
Home equity		255		75
Consumer loans		11		36
Other loans		—		—
	$	7,862	$	19,729

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

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2011 and 2010:

December 31, 2011

	Pass		Watch		Sub- standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	42,892	$	1,670	$	1,345	$	—	$	45,907
Real estate - commercial		95,699		7,971		11,274		—		114,944
Other real estate construction		26,256		745		4,600		—		31,601
Real estate 1 - 4 family construction		5,538		5		—		—		5,543
Real estate - residential		89,209		4,269		8,369		—		101,847
Home equity		49,743		861		809		—		51,413
Consumer loans		13,970		332		408		—		14,710
Other loans		602		—		—		—		602
Total	$	323,909	$	15,853	$	26,805	$	—	$	366,567

December 31, 2010

	Pass		Watch		Sub- standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	50,108	$	185	$	1,386	$	—	$	51,679
Real estate - commercial		81,410		4,520		18,455		738		105,123
Other real estate construction		41,709		301		10,260		—		52,270
Real estate 1 - 4 family construction		3,381		—		951		—		4,332
Real estate - residential		94,077		1,787		7,917		—		103,781
Home equity		50,902		158		974		—		52,034
Consumer loans		17,458		102		129		32		17,721
Other loans		739		—		—		—		739
Total	$	339,784	$	7,053	$	40,072	$	770	$	387,679

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2012 nonperforming loans decreased from $19.7 million at December 31, 2010 to $7.9 million at December 31, 2011, a decrease of $11.8 million. The major contributor to this decrease was a increase foreclosures and the transfer into other real estate owned of $8.2 million. The Company also had a $1.6 million loan relationship that was current and performing that had slipped into nonaccrual during 2010. This relationship was transferred back out of nonaccrual during 2011 after a proven payment history was reestablished and has remained current since that time. The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2011 and 2010:

December 31, 2011

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	45,578	$	329	$	45,907
Real estate - commercial		112,202		2,742		114,944
Other real estate construction		29,517		2,084		31,601
Real estate 1 - 4 family construction		5,543		—		5,543
Real estate - residential		99,406		2,441		101,847
Home equity		51,158		255		51,413
Consumer loans		14,699		11		14,710
Other loans		602		—		602
Total	$	358,705	$	7,862	$	366,567

December 31, 2010

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	51,178	$	501	$	51,679
Real estate - commercial		96,421		8,702		105,123
Other real estate construction		44,295		7,975		52,270
Real estate 1 - 4 family construction		3,832		500		4,332
Real estate - residential		101,444		2,337		103,781
Home equity		51,959		75		52,034
Consumer loans		17,675		46		17,721
Other loans		739		—		739
Total	$	367,543	$	20,136	$	387,679

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired a specific valuation is done and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2011 and 2010 (unpaid principal balance was grossed up for chargeoffs):

December 31, 2011

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	2,099	$	889	$	1,091	$	578	$	1,525	$	93
Real estate - commercial		14,951		11,365		1,523		452		16,520		716
Other real estate construction		4,016		2,644		1,370		107		7,746		236
Real estate 1 - 4 family construction		1,095		501		594		202		1,249		53
Real estate - residential		11,877		7,231		4,646		1,001		10,137		616
Home equity		993		753		240		124		1,194		37
Consumer loans		242		49		193		119		280		16
Other loans		—		—		—		—		—		—
Total	$	35,273	$	23,432	$	9,657	$	2,583	$	38,651	$	1,767

December 31, 2010

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	1,439	$	918	$	521	$	399	$	1,485	$	68
Real estate - commercial		21,985		16,088		4,233		1,384		13,279		1,129
Other real estate construction		10,357		2,585		7,770		1,818		9,380		609
Real estate 1 - 4 family construction		950		950		—		—		1,100		46
Real estate - residential		8,884		5,118		3,766		762		7,257		461
Home equity		1,066		677		388		136		821		40
Consumer loans		241		23		218		132		367		16
Other loans		—		—		—		—		—		—
Total	$	44,922	$	26,359	$	16,896	$	4,631	$	33,689	$	2,369

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Stock Based Compensation

12 Months Ended

Dec. 31, 2011

Stock Based Compensation [Abstract]

Stock Based Compensation

Note 16 - Stock Based Compensation

During 1996, the Company adopted the 1996 Incentive Stock Option Plan ("SOP") and the Employee Stock Purchase Plan ("SPP"), under which options to purchase shares of the Company's common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2011, the SOP had 111,210 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, 2011, the SOP II had 12,360 options outstanding and the SPP II had no options outstanding.

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2011:

	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Options outstanding at the beginning of the year		180,571		$	4.90	$	—
Options granted		—			—
Options exercised		—			—
Forfeitures		(57,001	)		4.34
Options outstanding at the end of the year		123,570		$	5.16	$	—
Options exercisable at the end of the year		118,626		$	5.15	$	—

Total options outstanding at December 31, 2011 were 123,570 at an exercise price range of $4.47 to $5.35 per share with a weighted average expected term of 2.37 years. Exercisable options at December 31, 2011 were 118,626 options at an exercise price range of $4.47 to $5.35 per share. At December 31, 2011, authorized shares of common stock reserved for future grants of options totaled 154,971 under the SOP II and 103,234 under the SPP II.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2011 and 2010 under the SOP II.

A summary of the status of the Company's non-vested stock grants as of December 31, 2011, and changes during the year then ended is presented below:

	Shares			Weighted Average Grant Date Fair Value
Non-vested December 31, 2010		7,416		$	1.60
Granted		—			—
Vested		(2,472	)		1.60
Forfeited		—			—
Non-vested December 31, 2011		4,944			1.60

The grant date fair value of stock options vested over the years ended December 31, 2011, 2010 and 2009 was $3,960, $3,960 and $26,438 respectively.

As of December 31, 2011, there was $4,333 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 1.3 years.

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

There were no options exercised in 2009, 2010 or 2011.

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Income Tax Matters

12 Months Ended

Dec. 31, 2011

Income Tax Matters [Abstract]

Income Tax Matters

Note 12 - Income Tax Matters

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

	2011			2010			2009
	(dollars in thousands)
Current tax expense (benefit):
Federal	$	(838	)	$	1,021		$	428
State		34			221			146
Total		(804	)		1,242			574
Deferred tax expense (benefit):
Federal		890			(891	)		(620	)
State		110			(200	)		(117	)
Total		1,000			(1,091	)		(737	)
Net provision for income taxes	$	196		$	151		$	(163	)

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:

	2011			2010			2009
	(dollars in thousands)
Tax computed at the statutory federal rate	$	373		$	294		$	179
Increases (decrease) resulting from:
Tax exempt interest, net		(247	)		(179	)		(269	)
State income taxes, net of federal benefit		94			14			19
Other		(24	)		22			(92	)
Provision for income taxes	$	196		$	151		$	(163	)

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:

	2011			2010			2009
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	2,439		$	3,253		$	1,772
Deferred compensation		595			518			635
Other		261			198			462
Valuation allowance		3			4			—
Total deferred tax assets		3,298			3,969			2,869
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		(1,164	)		(197	)		(613	)
Premises and equipment		(678	)		(381	)		(371	)
Deferred loans fees and costs		(205	)		(212	)		(214	)
Loan servicing		(206	)		(186	)		(158	)
Prepaid expenses		(149	)		(130	)		(157	)
Total deferred tax liabilities		(2,402	)		(1,106	)		(1,513	)
Net recorded deferred tax asset	$	896		$	2,863		$	1,356

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

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Leases

12 Months Ended

Dec. 31, 2011

Leases [Abstract]

Leases

Note 8 - Leases

Bank of Stanly had also entered into a noncancelable operating lease for a branch location in Locust that expired in 2010 with annual rental payments of $41,856. Bank of Stanly terminated the Locust lease in the third quarter of 2010 when the branch moved into a new building Stanly had constructed. The Company's subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $59,850. The lease has two five-year renewal options at the expiration of the initial term.

Future minimum lease payments under these leases for years subsequent to December 31, 2011 are as follows:

Year ending December 31,
(dollars in thousands)
2012	$	60
2013		60
2014		60
2015		60
2016		60
Thereafter		40
Total	$	340

Total rental expense related to the operating leases was $60,450, $85,538, and $106,350 for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in occupancy expense.

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Mortgage Servicing Assets

12 Months Ended

Dec. 31, 2011

Mortgage Servicing Assets [Abstract]

Mortgage Servicing Assets

Note 6 - Mortgage 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 $346 million and $327 million at December 31, 2011 and 2010, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

	2011			2010			2009
	(dollars in thousands)
Beginning of year mortgage servicing rights:	$	2,134		$	1,890		$	1,293
Amounts capitalized		679			1,113			1,465
Amortization		(671	)		(869	)		(868	)
Impairment		—			—			—
End of year	$	2,142		$	2,134		$	1,890

Amortization expense is estimated as follows:

Year ending December 31,
(dollars in thousands)
2012	$	504
2013		436
2014		369
2015		301
2016		233
Thereafter		299
Total	$	2,142

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

The fair value of mortgage servicing rights was $2.5 million at both December 31, 2011 and 2010. The key assumptions used to value mortgage servicing rights as of December 31, 2011 were as follows; weighted average remaining life 267 months, weighted average discount rate 9.0%, weighted average coupon 4.71% and weighted average prepayment speed 307%.

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Premises And Equipment

12 Months Ended

Dec. 31, 2011

Premises And Equipment [Abstract]

Premises And Equipment

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2011 and 2010 are listed below:

	2011		2010
	(dollars in thousands)
Land	$	4,094	$	4,081
Building and improvements		10,856		11,205
Furniture and equipment		7,254		6,128
Total fixed assets		22,204		21,414
Less accumulated depreciation		7,128		6,860
Net fixed assets	$	15,076	$	14,554

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Deposits

12 Months Ended

Dec. 31, 2011

Deposits [Abstract]

Deposits

Note 9 - Deposits

The composition of deposits at December 31, 2011 and 2010 is as follows:

	2011					2010
	Amount		Percentage of Total			Amount		Percentage of Total
	(dollars in thousands)
Demand deposits	$	62,339		15	%	$	54,837		13	%
Interest checking and money market		185,539		43	%		187,493		43	%
Savings		39,273		9	%		37,624		8	%
Time deposits $100,000 and over		58,274		13	%		59,431		14	%
Other time deposits		85,913		20	%		94,648		22	%
Total	$	431,338		100	%	$	434,033		100	%

The maturities of fixed-rate time deposits at December 31, 2011 are reflected in the table below:

Year ending December 31,	Time Deposits $100,000 and Over		Other Time Deposits
	(dollars in thousands)
2012	$	28,346	$	41,695
2013		11,814		19,274
2014		2,406		8,176
2015		4,885		6,870
2016		10,823		9,898
Thereafter		—		—
Total	$	58,274	$	85,913

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Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions

Note 14 - Related Party Transactions

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

(dollars in thousands)

Balance at December 31, 2010	$	18,232
Disbursements during the year		1,610
Collections during the year		(4,965	)
Balance at December 31, 2011	$	14,877

At December 31, 2011, the Company had approved, but unused lines of credit, totaling $4.5 million to executive officers and directors, and their related interests.

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Parent Company Financial Data

12 Months Ended

Dec. 31, 2011

Parent Company Financial Data [Abstract]

Parent Company Financial Data

Note 19 - Parent Company Financial Data

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

Condensed Balance Sheets

	December 31,
	2011		2010
	(dollars in thousands)
Assets
Cash and demand deposits with bank subsidiaries	$	307	$	859
Interest-earning deposits with bank subsidiaries		9,142		11,271
Investments in:
Bank subsidiaries		50,596		46,878
Nonbank subsidiaries		913		704
Other assets		2,453		2,612
Total assets	$	63,411	$	62,324
Liabilities and shareholders' equity
Master notes	$	6,208	$	8,594
Junior subordinated debentures		11,127		9,895
Other liabilities		473		342
Shareholders' equity		45,603		43,493
Total liabilities and shareholders' equity	$	63,411	$	62,324

Condensed Statements of Income

	2011			2010			2009
	(dollars in thousands)
Equity in earnings of subsidiaries	$	1,649		$	1,445		$	1,260
Interest income		64			50			113
Management and service fees		6,689			6,407			5,468
Other income		104			26			91
Interest expense		(674	)		(479	)		(533	)
Other operating expense		(7,304	)		(7,003	)		(6,122	)
Income tax benefit		372			267			413
Net income	$	900		$	713		$	690
Net income	$	900		$	713		$	690
Dividends - preferred stock		(645	)		(645	)		(642	)
Net Income available to common shareholders	$	255		$	68		$	48
Net income per common share
Basic	$	0.03		$	0.01		$	0.01
Diluted	$	0.03		$	0.01		$	0.01
Weighted average shares outstanding
Basic		7,467,396			7,485,373			7,474,140
Diluted		7,467,396			7,485,373			7,474,140

Condensed Statements of Cash Flows

	2011			2010			2009
	(dollars in thousands)
Cash flows from operating activities
Net income	$	900		$	713		$	690
adjustments to reconcile net income to net cash used by operating activities:
Equity in earnings of subsidiaries		(1,649	)		(1,445	)		(1,260	)
(Increase) decrease in other assets		(203	)		174			(753	)
Increase (decrease) in other liabilities		131			7			(30	)
Net cash used by operating activities		(821	)		(551	)		(1,353	)
Cash flows from investing activities
Dividends received from subsidiaries		—			1,300			900
Net cash provided by investing activities		—			1,300			900
Cash flows from financing activities
Net increase (decrease) in master notes		(2,386	)		(2,888	)		2,579
Net increase (decrease) in long-term debt		—			—			(2,600	)
Net proceeds from issuance of junior subordinated debentures		1,232			2,476			—
Increase in unearned ESOP compensation		(161	)		(100	)		—
Dividends on preferred stock		(545	)		(545	)		(542	)
Net cash used by financing activities		(1,860	)		(1,057	)		(563	)
Net decrease in cash and cash equivalents		(2,681	)		(308	)		(1,016	)
Cash and cash equivalents at beginning of year		12,130			12,438			13,454
Cash and cash equivalents at end of year	$	9,449		$	12,130		$	12,438

Selected Financial Data

(in thousands except per share and shares outstanding information)

	2011			2010			2009			2008			2007
Summary of Operations
Interest income	$	23,822		$	24,487		$	25,062		$	25,564		$	26,909
Interest expense		4,737			5,951			7,697			9,828			11,876
Net interest income		19,085			18,536			17,365			15,736			15,033
Provision for loan losses		3,456			4,919			1,732			969			15
Noninterest income		8,256			9,898			5,824			6,597			6,590
Noninterest expense		22,789			22,651			20,930			18,531			17,362
Income tax expense(benefit)		196			151			(163	)		804			1,287
Net income	$	900		$	713		$	690		$	2,029		$	2,959
Per Common Share
Net income - basic (1)	$	0.03		$	0.01		$	0.01		$	0.27		$	0.39
Net income - diluted (1)		0.03			0.01			0.01			0.27			0.39
Book value (1)		4.65			4.38			4.47			4.11			4.14
Weighted Average Shares
Outstanding:
Basic (1)		7,467,396			7,485,373			7,474,140			7,482,488			7,603,494
Diluted (1)		7,467,396			7,485,373			7,474,140			7,520,484			7,706,832
Ratios
Return on average assets		0.17	%		0.14	%		0.15	%		0.48	%		0.75	%
Return on average equity		2.02	%		1.57	%		1.60	%		6.29	%		9.73	%
Average equity to average assets		8.39	%		8.83	%		9.15	%		7.63	%		7.73	%
Selected Year-end Balances
Assets	$	526,902		$	535,426		$	477,846		$	452,468		$	411,944
Loans held for investment		366,675			387,769			353,729			340,830			321,987
Securities		88,661			96,395			76,317			68,835			51,005
Deposits		431,338			434,033			376,774			353,627			324,657
Borrowed funds		46,024			54,543			53,583			54,751			53,619
Shareholders' equity		45,603			43,493			44,024			41,233			31,574
Selected Average Balances
Assets	$	529,970		$	514,425		$	471,729		$	422,857		$	393,188
Loans held for investment		381,419			375,381			346,976			335,791			308,149
Securities		90,701			86,780			78,049			48,926			41,188
Deposits		430,998			406,304			369,957			337,384			312,261
Borrowed funds		50,529			58,291			55,084			50,643			48,075
Shareholders' equity		44,462			45,425			43,182			32,245			30,402

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2007 and 2008 have been adjusted to reflect 3% stock dividends issued in 2008 and 2007. There was not a stock dividend issued in 2011, 2010 or 2009.

A discussion and analysis of the Company's operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 37 - 82 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect 3% stock dividends in 2008 and 2007. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "might," "planned," "estimated," and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services.

Financial Condition at December 31, 2011 and December 31, 2010

The Company's total assets decreased $8.5 million or 1.59% from $535.4 million at December 31, 2010 to $526.9 million at December 31, 2011. This decrease resulted primarily from a $21.1 million decrease in loans held for investment and a $7.7 million decrease in securities available for sale.

Cash and cash equivalents increased $15.0 million during the year ended December 31, 2011. Cash and due from banks grew $2.5 million, while interest-earning deposits with banks increased $12.5 million.

Investment securities decreased $7.7 million or 8.0%, from $96.4 million at December 31, 2010 to $88.7 million at December 31, 2011. During the year in an effort to improve our interest rate risk position, management made the decision to shorten the duration of our investment portfolio by selling $24.6 million of securities, including $22.7 million of US Treasuries and government agency bonds and $1.9 million of small mortgage backed securities. The Company realized a gain of $933,000 on these transactions. The proceeds from these sales are being reinvested in defensive duration mortgage backed securities which will provide a shorter maturity and a monthly cash flow and protection in a rising rate environment. At December 31, 2011, the Company had net unrealized gains of $3.4 million.

Loans held for investment decreased $21.1 million from $387.8 million at December 31, 2010 to $366.7 million at December 31, 2011. The Company experienced declines in growth trends in all areas of the loan portfolio except commercial real estate and real estate 1-4 family construction, which increased $9.8 million and $1.2 million, respectively. Other real estate construction and commercial loans experienced the largest declines at 39.4% and 11.2%, respectively. Loans held for sale decreased 68.9% or $4.3 million compared to the prior year. This decrease was attributed to the volatility in mortgage rates and a decline in demand as rates increased. The allowance for loan losses was $6.8 million at December 31, 2011, which represents 1.86% of the loan portfolio, a decrease from $9.1 million or 2.34% at December 31, 2010. During 2011, the Company foreclosed on several loan relationships that played a major part in net chargeoffs of $5.8 million for the year ended December 31, 2011 compared to $1.1 million for 2010. This increase in chargeoffs directly affected the decline in allowance for loss.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Premises and equipment, bank owned life insurance and other real estate owned increased $522,000, $196,000 and $8.2 million, respectively. As aforementioned, the Company foreclosed on several loans during the period, with two relationships totaling $5.1 million contributing largely to the increase in other real estate owned. The Company does have $1.1 million of other real estate owned under contract to sell and is expected to close on those transactions later in the first quarter of 2012. Accrued interest receivable and prepaid assets declined $324,000 and $741,000, respectively. Federal Home Loan Bank stock decreased $766,000 because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company's required ownership in Federal Reserve Bank stock also increased $24,000 during the year, included in other assets which increased $194,000 for the year.

Customer deposits continued to be our principal funding source in 2011. At December 31, 2011, deposits from our customers totaled $431.3 million, a decrease of $2.7 million, or 0.62%, from $434.0 million at December 31, 2010. Demand noninterest bearing checking increased $7.5 million, while interest savings accounts increased $1.6 million for the period. Interest checking and money market accounts declined $2.0 million during 2011. Time deposits over $100,000 and other time deposits declined $1.2 million and $8.7 million respectively during 2011, primarily from a shift to other deposit accounts.

During 2011 the Company's net borrowings decreased by $8.5 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2011, $27 million of the total borrowings of $46.0 million were attributed to Federal Home Loan Bank advances. During the third quarter of 2010, the Company began a second junior subordinated debt offering. This offering was completed in 2011 raising $11.1 million. The Company called the first junior subordinated debt issued in 2008 in March of 2011 at the completion of the second offering. See note 11 for additional information on the new offering.

At December 31, 2011, total shareholders' equity was $45.6 million, an increase of $2.1 from December 31, 2010. Net income for the period was $900,000. Net income was offset by a net increase in unearned ESOP compensation of $80,000. Net income was also offset as the Company recorded $545,000 in dividends on its series A and B preferred stock for the twelve month period. The other factor related to the increase in total equity was an increase of $1.9 million in unrealized gains on investment securities. At December 31, 2011, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Results of Operations for the Years Ended December 31, 2011 and 2010

Earnings

Uwharrie Capital Corp reported net income of $900,000 for the twelve months ended December 31, 2011, as compared to $713,000 for the twelve months ended December 31, 2010, an increase of $187,000. Net income available to common shareholders was $255,000 or $0.03 per common share at December 31, 2011, compared to $68,000 or $0.01 per common share at December 31, 2010. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

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

Net interest income increased $549,000 to $19.1 million for 2011 compared to the $18.5 million earned in 2010. During the year ended December 31, 2011 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $562,000. The average yield on our interest-earning assets decreased 26 basis points to 4.99%, while the average rate we paid for our interest-bearing liabilities decreased 32 basis points. The Company's assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in an increase of six basis points in our interest rate spread, from 3.81% in 2010 to 3.87% in 2011. Our net interest margin for 2011 was 4.01%, compared to 3.99% in 2010. A portion of the Company's loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a strong interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 96 presents a detailed analysis of the components of the Company's net interest income while Financial Table 2 on page 97 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 $3.5 million and $4.9 million for the twelve months ended December 31, 2011 and 2010 respectively. There were net loan charge-offs of $5.7 million for the twelve months ended December 31, 2011 as compared with net loan charge-offs of $1.1 million during the same period of 2010. Refer to the Asset Quality discussion beginning on page 88 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 16.6%, from $9.9 million in 2010, to $8.3 million in 2011, a decrease of $1.6 million. While the Company benefited from another strong year of income from mortgage loan sales, income from mortgage loan sales declined $1.4 million to $1.8 million for 2011 compared to $3.2 million during 2010. Even with the volatility in interest rates during the year, mortgage loan rates continued to be attractive for buyers and rates did decline at several times during 2011 allowing customers to be able to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $1.8 million, a decrease of 17.2%. These decreases were offset by an increase in other service fees and commissions of $526,000 generated mainly from brokerage commissions and asset management fees which increased $312,000 to $1.8 million and other banking fees which increased $214,000 during 2011. The recent downturn in the economy over the last several years that impacted the overall stock market and customer's confidence to actively trade continued to turn around in 2011 contributing to the growth in brokerage commissions and asset management fees. The Company realized gains from the sale of securities of $933,000 on the securities available for sale compared to realized losses of $1.5 million in 2010.

Noninterest Expense

Noninterest expense for the year ended December 31, 2011 was $22.8 million compared to $22.7 million for the same period of 2010, a small increase of $138,000. Salaries and employee benefits, the largest component of noninterest expense, increased $473,000, from $11.6 million for the period ending December 31, 2010 to $12.1 million for the same period in 2011. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Professional fees and services increased $258,000, while foreclosed real estate expense increased $102,000 both due mainly to increased loan collection costs. Data processing costs reflected a modest increase of $5,000, while software costs increased by $31,000. Growth in electronic banking operations, including preparation for new services, created increased expense of $64,000. These increases were offset by a decline in marketing and donations expense of $522,000 that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development. Net occupancy and equipment expense had a combined decrease of $39,000. Other noninterest expense also decreased $142,000 for the comparable twelve month period. The table on page 100 reflects the additional breakdown of other noninterest expense. FDIC assessment costs decreased $45,000 during the twelve month ending December 31, 2011. During 2009, the FDIC had implemented a special one-time assessment which amounted to $209,000 for the Company's subsidiary banks that did not recur during 2010 or 2011.

Income Tax Expense

The Company had an income tax expense of $196,000 for 2011 at an effective tax rate of 17.88% compared to income tax expense of $151,000 in 2010 with an effective tax rate of 17.48%. Income taxes computed at the statutory rate and are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance.

Results of Operations for the Years Ended December 31, 2010 and 2009

Earnings

Uwharrie Capital Corp reported net income of $713,000 for the twelve months ended December 31, 2010, as compared to $690,000 for the twelve months ended December 31, 2009, an increase of $23,000. Net income available to common shareholders was $68,000 or $0.01 per common share at December 31, 2010, compared to $48,000 or $0.01 per common share at December 31, 2009. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

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

Net interest income increased $1.2 million to $18.5 million for 2010 compared to the $17.4 million earned in 2009. During the year ended December 31, 2010 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $1.9 million. The average yield on our interest-earning assets decreased 64 basis points to 5.25%, while the average rate we paid for our interest-bearing liabilities decreased 59 basis points. The Company's assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in a decrease of five basis points in our interest rate spread, from 3.86% in 2009 to 3.81% in 2010. Our net interest margin for 2010 was 3.99%, compared to 4.12% in 2009. Financial Table 1 on page 96 presents a detailed analysis of the components of the Company's net interest income while Financial Table 2 on page 97 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $4.9 million and $1.7 million for the twelve months ended December 31, 2010 and 2009 respectively. There were net loan charge-offs of $1.1 million for the twelve months ended December 31, 2010 as compared with net loan charge-offs of $817,000 during the same period of 2009. Refer to the Asset Quality discussion beginning on page 88 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 70.0%, from $5.8 million in 2009 to $9.9 million in 2010, an increase of $4.1 million. The Company benefited from another strong year of income from mortgage loan sales. Income from mortgage loan sales was $3.2 million for 2010 compared to $3.4 million during 2009, a decrease of $264,000. Mortgage loan rates continued to be attractive for buyers and rates did decline during 2010 allowing customers to be able to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $2.2 million, a decrease of 6.0%. These decreases were offset by an increase in other service fees and commissions of $610,000 generated from brokerage commissions and asset management fees which increased $270,000 to $1.5 million and other banking fees which increased $340,000 during 2010. The recent downturn in the economy that impacted the overall stock market and customer's confidence to actively trade during 2009 began to turn around in 2010 attributing to the growth in brokerage commissions and asset management fees. The Company realized gains of $1.5 million on the securities available for sale compared to realized losses of $711,000 in 2009. As previously discussed, the Company did not have other-than-temporary impairment during 2010 compared to $1.8 million 2009.

Noninterest Expense

Noninterest expense for the year ended December 31, 2010 was $22.7 million compared to $20.9 million for the same period of 2009, an increase of $1.8 million. Salaries and employee benefits, the largest component of noninterest expense, increased $121,000, from $11.5 million for the period ending December 31, 2009 to $11.6 million for the same period in 2010. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy and equipment expense had a combined increase of $189,000. Professional fees and services increased $262,000 due mainly to increased loan collection costs. Data processing costs reflected a modest increase of $61,000, while software costs increased by $72,000. Growth in electronic banking operations, including preparation for new services, created increased expense of $83,000. Marketing and donations expense grew by $545,000 and included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development. Other noninterest expense increased $334,000 for the comparable twelve month period. The table on page 100 reflects the additional breakdown of other noninterest expense. FDIC assessment costs decreased $163,000 during the twelve month ending December 31, 2010. During 2009, the FDIC had implemented a special one-time assessment which amounted to $209,000 for the Company's subsidiary banks that did not recur during 2010.

Income Tax Expense

The Company had an income tax expense of $151,000 for 2010 at an effective tax rate of 17.48% compared to income tax benefit of $163,000 in 2009. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance.

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 is reduced by loans charged off. Management continuously evaluates the adequacy of the allowance for loan loss. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower's ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company's credit administration function, through a review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan's credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower's risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loans observable market price or the estimated fair value of the underlying collateral less the selling costs, if the loan is deemed to be collateral dependent. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss, and reserves are allocated based on management's judgment and historical experience.

The allowance for loan losses represents management's best estimate of an appropriate amount to provide for inherent risk in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the 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 banking regulators, in reviewing the Company's portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company's financial condition and results of operations.

The provision for loan losses was $3.5 million for the year ended December 31, 2011 as compared to $4.9 million for the same period in 2010. At the end of 2011 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $33.1 million compared to $43.3 million at December 31, 2010, a decrease of $10.2 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $19.7 million at December 31, 2010 to $7.9 million at December 31, 2011. The primary factor in the decrease in both impaired and nonaccrual loans was the increase in foreclosures and the subsequent increase of $8.2 million in other real estate owned. The Company also had a $1.6 million loan relationship that was current and performing for a period of time but which was placed in nonaccrual until there was a proven payment history could be reestablished. This relationship was transferred out of nonaccrual and into the current portfolio during the second quarter of 2011. The Company had net loan charge-offs for 2011 of $5.7 million compared to net loan charge-offs of $1.1 million for the same period in 2010. During 2011 the Company had two loan relationships with chargeoffs totaling $2.6 million that greatly impacted the increase.

The allowance expressed as a percentage of gross loans held for investment decreased 48 basis points from 2.34% at December 31, 2010 to 1.86% at December 31, 2011. The decrease in the allowance was a direct impact of the write down and chargeoff of impaired loans. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.29% at December 31, 2010 and 1.27% at December 31, 2011, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 10.71% to 7.81%, a decrease of 290 basis points. During 2011, along with the aforementioned chargeoffs of $1.2 million, the Company had several partial charge-offs contributing to the decrease. During the third quarter of 2010 we upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations. During the first quarter of 2011 the Company added an additional section to its loan loss model to account for other qualitative and/or environmental factors. This new section accounted for $42,000 in increased reserves during the year. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 5.19% at December 31, 2010, to 2.14% at December 31, 2011. As discussed above, during the period the Company had a net increase of $8.2 million in other real estate owned. The primary components of the increase in other real estate owned were, two loan relationships which consisted of six pieces of property totaling $5.1 million. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at December 31, 2011 totaled $6.0 million and $5.1 millionat December 31, 2010.

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

Nonperforming Assets

(dollars in thousands)

	At December 31,
	2011			2010			2009			2008			2007
Nonperforming Assets:
Nonaccrual loans past due 90 days or more	$	—		$	407		$	282		$	3		$	—
Nonaccrual loans		7,862			19,730			5,630			3,898			1,795
Other real estate owned		10,258			2,022			3,419			2,816			163
Total nonperforming assets	$	18,120		$	22,159		$	9,331		$	6,717		$	1,958
Allowance for loan losses	$	6,815		$	9,067		$	5,276		$	4,361		$	3,510
Nonperforming loans to total loans		2.14	%		5.19	%		1.67	%		1.14	%		0.56	%
Allowance for loan losses to total loans		1.86	%		2.34	%		1.49	%		1.28	%		1.09	%
Nonperforming assets to total assets		3.44	%		4.14	%		1.95	%		1.48	%		0.48	%
Allowance for loan losses to nonperforming loans		86.88	%		45.03	%		89.24	%		111.79	%		195.54	%

Capital Resources

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

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders' equity and a minimum Tier I leverage ratio of 4%. Banks which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a Tier I leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2011, the Company's subsidiary banks were all well capitalized.

The Company expects to continue to exceed these minimums without altering current operations or strategy. Note 15 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 last declared a 3% stock dividend in 2008. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends. There was not a dividend declared in 2011, 2010 or 2009.

Liquidity

Liquidity, the ability to raise cash when needed without adversely impacting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 4 on page 99, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2011 included $23.8 million in federal funds lines of credit from correspondent banks and approximately $25.9 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $20.1 million. 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, 2011, borrowings from federal funds lines and the issuance of commercial paper amounted to $5.8 million, while other short-term borrowings totaled $15.0 million. Long-term debt at that date consisted of advances of $14.0 million from the Federal Home Loan Bank, junior subordinated debt of $11.1 million, a mortgage payable of $59,000 and a note payable for the purchase of a building of $50,000.

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

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2011.

	Payments Due by Period (in thousands)
	Total		On Demand or less than 1 year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Short-term debt	$	20,791	$	20,791	$	—	$	—	$	—
Long-term debt		25,233		—		14,070		23		11,140
Operating leases		340		60		120		120		40
Total contractual cash obligations, excluding deposits		46,364		20,851		14,190		143		11,180
Deposits		431,338		357,192		41,670		32,476		—
Total contractual cash obligations, including deposits	$	477,702	$	378,043	$	55,860	$	32,619	$	11,180

Critical Accounting Policy

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 Note 1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

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

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. The evaluation of goodwill for impairment included both the income and market approaches to value the Company. The income approach consisted of discounting projected long-term future cash flows, which were derived from internal forecasts and economic expectations for the Company. The significant input to the income approach included the discount rate, which was determined utilizing the Company's cost of capital adjusted for a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. This method also included different levels of increased cash flows to be generated from estimated synergies obtained assuming collapsing the bank charters and removal of certain nonrecurring expenses. Under the market approach, a value was calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions. Our goodwill testing performed as of October 31, 2011 and subsequent evaluation through December 31, 2011 for triggering events indicated that the Company's fair value supported the recorded goodwill.

Income Taxes

The calculation of the Company's income tax expense is complex and requires the use of many estimates and judgments in its determination. Management's determination of the realization of the net deferred tax asset is based upon management's evaluation of positive and negative evidence related to cumulative pretax earnings over a three year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.

Valuation of Foreclosed Assets

Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

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 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

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

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 2011 is reflected in Financial Table 3 on page 66. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional gap analysis. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rates environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary banks, using a no growth and most likely balance sheet growth, for a two year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one year horizon, indicates a negative impact of (7.95%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 8.78% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, all three of the subsidiary banks are asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. All three of the subsidiary banks have the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

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

Financial Table 1

Average Balances and Net Interest Income Analysis

(dollars in thousands)

	2011							2010							2009
	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	$	80,089		1,777		2.22	%	$	78,479		2,508		3.20	%	$	63,934	$	3,128		4.89	%
Non-taxable securities (1)		10,612		371		5.70	%		8,301		319		6.25	%		14,115		622		7.17	%
Short-term investments		13,282		65		0.49	%		9,211		44		0.48	%		6,334		66		1.04	%
Taxable loans (2)		372,415		21,222		5.70	%		371,057		21,378		5.76	%		345,448		21,020		6.08	%
Non-taxable loans (1)		10,152		387		6.20	%		6,258		238		6.18	%		4,387		226		8.38	%
Total interest-earning assets		486,550		23,822		4.99	%		473,306		24,487		5.25	%		434,218		25,062		5.89	%
Non-earning assets
Cash and due from banks		6,470							6,449							7,057
Premises and equipment, net		14,814							14,246							12,616
Interest receivable and other		22,136							20,424							17,838
Total non-earning assets		43,420							41,119							37,511
Total assets	$	529,970						$	514,425						$	471,729
Interest-bearing liabilities
Savings deposits	$	39,432	$	286		0.73	%	$	35,535	$	327		0.92	%	$	30,912	$	255		0.82	%
Interest checking & MMDA		178,947		785		0.44	%		162,373		971		0.60	%		120,307		838		0.70	%
Time deposits		154,887		2,244		1.45	%		158,173		2,876		1.82	%		172,108		4,816		2.80	%
Total deposits		373,266		3,315		0.89	%		356,081		4,174		1.17	%		323,327		5,909		1.83	%
Short-term borrowed funds		24,133		354		1.47	%		26,352		693		2.63	%		24,092		316		1.31	%
Long-term debt		26,396		1,068		4.05	%		31,939		1,084		3.39	%		30,992		1,472		4.75	%
Total interest-bearing liabilities		423,795		4,737		1.12	%		414,372		5,951		1.44	%		378,411		7,697		2.03	%
Noninterest liabilities
Transaction deposits		57,732							50,223							46,630
Interest payable and other		3,981							4,405							3,506
Total liabilities		485,508							469,000							428,547
Shareholders' equity		44,462							45,425							43,182
Total liabilities and shareholders equity	$	529,970						$	514,425						$	471,729
Interest rate spread						3.87	%						3.81	%						3.86	%
Net interest income and net interest margin			$	19,085		4.01	%			$	18,536		3.99	%			$	17,365		4.12	%

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.

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)

	2011 Versus 2010									2010 Versus 2009
	Volume			Rate			Net Change			Volume			Rate			Net Change
Interest-earning assets
Taxable securities	$	44		$	(775	)	$	(731	)	$	588		$	(1,208	)	$	(620	)
Non-taxable securities		85			(33	)		52			(240	)		(63	)		(303	)
Short-term investments		20			1			21			22			(44	)		(22	)
Taxable loans		78			(234	)		(156	)		1,517			(1,159	)		358
Non-taxable loans		148			1			149			84			(72	)		12
Total interest-earning assets		375			(1,040	)		(665	)		1,971			(2,546	)		(575	)
Interest-bearing liabilities
Savings deposits		32			(73	)		(41	)		40			32			72
Transaction and MMDA deposits		86			(272	)		(186	)		272			(139	)		133
Other time deposits		(54	)		(578	)		(632	)		(322	)		(1,618	)		(1,940	)
Short-term borrowed funds		(45	)		(294	)		(339	)		45			332			377
Long-term debt		(206	)		190			(16	)		39			(427	)		(388	)
Total interest-bearing liabilities		(187	)		(1,027	)		(1,214	)		74			(1,820	)		(1,746	)
Net interest income	$	562		$	(13	)	$	549		$	1,897		$	(726	)	$	1,171

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.

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	$	8,605		$	—		$	—		$	4,329		$	8,266		$	21,200
Investment securities		927			1,428			3,719			33,410			49,177			88,661
FHLB and other stock		—			—			—			—			3,789			3,789
Loans held for sale		1,958			—			—			—			—			1,958
Loans held for investment		104,614			25,982			44,705			140,084			51,290			366,675
Total interest-earning assets		116,104			27,410			48,424			177,823			112,522			482,283
Interest-bearing liabilities
Deposits		39,514			26,247			45,521			212,413			107,643			431,338
Short-term borrowed funds		17,731			2,060			1,000			—			—			20,791
Long-term debt		—			—			—			14,106			11,127			25,233
Total interest-bearing liabilities		57,245			28,307			46,521			226,519			118,770			477,362
Interest sensitivity GAP per period	$	58,859		$	(897	)	$	1,903		$	(48,696	)	$	(6,248	)	$	4,921
Cumulative interest sensitivity GAP	$	58,859		$	57,962		$	59,865		$	11,169		$	4,921		$	4,921
Ratios
Cumulative gap as a percentage of total interest-earning assets		12.20	%		12.02	%		12.41	%		2.32	%		1.02	%		1.02	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		202.82	%		167.75	%		145.33	%		103.11	%		101.03	%		101.03	%

Financial Table 4

Investment Securities Portfolio Analysis

(dollars in thousands)

	December 31, 2011
	Amortized Cost		Estimated Fair Value		Book Yield(1)
Securities available for sale
U. S. Treasury
Due within one year		999		1,009		1.50	%
Due after one but within five years		4,071		4,377		2.60	%
Due after five but within ten years		27,003		28,146		1.81	%
		32,073		33,532		1.90	%
U.S. Government agencies
Due one within one year		1,288		1,319		4.48	%
Due after one but within five years		17,854		18,678		2.32	%
		19,142		19,997		2.46	%
Mortgage-backed securities
Due after five but within ten year		3,387		3,557		3.28	%
Due after ten years		20,629		20,706		3.19	%
		24,016		24,263		3.20	%
State and political
Due within one year		125		126		5.23	%
Due after one but within five years		3,634		3,784		4.13	%
Due after five but within ten year		4,708		5,208		3.07	%
Due after ten years		1,604		1,751		4.14	%
		10,071		10,869		3.65	%
Total Securities available for sale
Due within one year		2,412		2,454		3.28	%
Due after one but within five years		25,559		26,839		2.62	%
Due after five but within ten year		35,098		36,911		2.12	%
Due after ten years		22,233		22,457		3.26	%
	$	85,302	$	88,661		2.60	%

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.

Financial Table 5

Noninterest Income

(dollars in thousands)

	Year Ended December 31,
	2011			2010			2009
Service charges on deposit accounts	$	1,837		$	2,219		$	2,360
Other banking fees		1,576			1,362			1,023
Asset management fees		1,670			1,357			1,054
Brokerage commissions		163			164			196
Other noninterest income		353			543			480
Income from mortgage loan sales		1,806			3,172			3,436
Security gains (losses)		933			1,484			(711	)
Loss on nonmarketable securities		—			—			(172	)
Total other-than-temporary impairment loss		—			—			(1,807	)
Portion of loss recognized in other comprehensive income		—			—			—
Net impairment recognized in other comprehensive income		—			—			(1,807	)
Losses from sale of OREO		(68	)		(332	)		(36	)
Other gains (losses) from sale of assets		(14	)		(71	)		1
Total noninterest income	$	8,256		$	9,898		$	5,824

Financial Table 6

Other Noninterest Expense

(dollars in thousands)

	Year Ended December 31,
	2011		2010		2009
Postage	$	192	$	221	$	200
Telephone and data lines		167		233		237
Loan collection cost		250		330		185
Shareholder relations expense		93		150		187
Dues and subscriptions		157		186		161
Other		1,747		1,628		1,444
Total other noninterest expense	$	2,606	$	2,748	$	2,414

Financial Table 7

Loan Portfolio Composition

(dollars in thousands)

	At December 31,
	2011						2010						2009
	Amount			% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	45,907			12.52	%	$	51,679			13.33	%	$	51,723			14.63	%
Real estate - construction		37,144			10.13	%		56,602			14.60	%		44,976			12.72	%
Real estate - residential		153,260			41.81	%		155,814			40.19	%		144,154			40.77	%
Real estate - commercial		114,944			31.36	%		105,123			27.12	%		95,938			27.13	%
Consumer		14,710			4.01	%		17,721			4.57	%		16,628			4.70	%
Other		602			0.16	%		739			0.19	%		172			0.05	%
Total loans		366,567			100.00	%		387,678			100.00	%		353,591			100.00	%
Less:
Allowance for loan losses		(6,815	)					(9,067	)					(5,276	)
Unearned net loan fees		108						91						138
Net loans	$	359,860					$	378,702					$	348,453

	At December 31,
	2008						2007
	Amount			% of Total Loans			Amount			% of Total Loans
Loan type:
Commercial	$	45,470			13.35	%	$	37,724			11.72	%
Real estate - construction		50,661			14.87	%		46,546			14.46	%
Real estate - residential		139,346			40.90	%		135,842			42.21	%
Real estate - commercial		89,561			26.29	%		86,593			26.90	%
Consumer		15,499			4.55	%		15,022			4.67	%
Other		121			0.04	%		143			0.04	%
Total loans		340,658			100.00	%		321,870			100.00	%
Less:
Allowance for loan losses		(4,361	)					(3,510	)
Unearned net loan fees		172						117
Net loans	$	336,469					$	318,477

Financial Table 8

Selected Loan Maturities

(dollars in thousands)

	December 31, 2011
	One Year or Less		One to Five Years		Over Five Years		Total
Commercial and agricultural	$	21,021	$	16,302	$	8,584	$	45,907
Real estate - construction		15,026		16,485		5,633		37,144
Total selected loans	$	36,047	$	32,787	$	14,217	$	83,051
Fixed rate loans	$	19,932	$	93,633	$	83,195	$	196,760
Sensitivity to rate changes:
Variable interest rates	$	169,915	$	—	$	—	$	169,915

Financial Table 9

Activity in the Allowance for Loan Loss

(dollars in thousands)

	At or for the Year Ended December 31,
	2011			2010			2009			2008			2007
Allowance for loan losses at beginning of year	$	9,067		$	5,276		$	4,361		$	3,510		$	3,171
Provision for loan losses		3,456			4,919			1,732			969			15
Other		(5	)		17			—			—			—
Loan charge-offs:
Commercial		336			59			39			122			—
Real estate		5,110			924			692			15			—
Consumer		390			206			140			151			224
Total charge-offs		5,836			1,189			871			288			224
Recoveries of loans previously charged off:
Commercial		4			3			19			120			440
Real estate		28			4			14			—			—
Consumer		101			37			21			50			108
Total recoveries		133			44			54			170			548
Net charge-offs (recoveries)		5,703			1,145			817			118			(324	)
Allowance for loan losses at end of year	$	6,815		$	9,067		$	5,276		$	4,361		$	3,510
Net (charge-offs) recoveries as a percent of average loans		1.50	%		0.31	%		0.24	%		0.04	%		(0.11	)%

Financial Table 10

Allocation of the Allowance for Loan Losses

(dollars in thousands)

	At December 31,
	2011					2010					2009
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	1,127		12.52	%	$	966		13.33	%	$	449		14.63	%
Real estate - construction		557		10.13	%		2,190		14.60	%		1,373		12.72	%
Real estate - residential		2,924		41.81	%		2,629		40.19	%		1,477		40.77	%
Real estate - commercial		1,459		31.36	%		2,240		27.12	%		1,541		27.13	%
Consumer loans		667		4.01	%		984		4.57	%		436		4.70	%
Other		81		0.16	%		58		0.19	%		—		0.05	%
Unallocated		—		—	%		—		—	%		—		—	%
Total loans	$	6,815		100.00	%	$	9,067		100.00	%	$	5,276		100.00	%

	At December 31,
	2008					2007
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
Commercial	$	288		13.35	%	$	326		11.72	%
Real estate - construction		1,232		14.87	%		325		14.46	%
Real estate - residential		1,180		40.90	%		922		42.21	%
Real estate - commercial		1,385		26.29	%		1,715		26.90	%
Consumer		276		4.55	%		222		4.67	%
Other		—		0.04	%		—		0.04	%
Unallocated		—		—	%		—		—	%
Total loans	$	4,361		100.00	%	$	3,510		100.00	%

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

Financial Table 11

Maturities of Time Deposits

(dollars in thousands)

	3 Months or Less		Over 3 Months to 6 Months		Over 6 Months to 12 Months		Over 12 Months		Total
Time Deposits of $100,000 or more	$	11,827	$	7,076	$	9,443	$	29,928	$	58,274
Other Time Deposits		13,538		10,119		18,038		44,218		85,913
	$	25,365	$	17,195	$	27,481	$	74,146	$	144,187

Financial Table 12

Performance Ratios

	At December 31,
	2011			2010			2009			2008			2007
Return on average assets		0.17	%		0.14	%		0.15	%		0.48	%		0.75	%
Return on average equity		2.02	%		1.57	%		1.60	%		6.29	%		9.73	%
Equity to average assets ratio		8.39	%		8.83	%		9.15	%		7.63	%		7.73	%

XML

Consolidated Statements Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Consolidated Statements Of Comprehensive Income [Abstract]
Net Income	$ 900	$ 713	$ 690
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities	3,759	390	1,637
Related tax effect	(1,327)	(156)	(621)
Reclassification of losses (gains) recognized in net income	(933)	(1,484)	711
Related tax effect	360	572	(274)
Reclassification of losses for which credit-related portion other-than-temporary impairment was recognized in net income			1,807
Related tax effect			(697)
Total other comprehensive income (loss)	1,859	(678)	2,563
Comprehensive income	$ 2,759	$ 35	$ 3,253

XML

Loans Held For Investment

12 Months Ended

Dec. 31, 2011

Loans Held For Investment [Abstract]

Loans Held For Investment

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2011 and 2010 is as follows:

	2011			2010
	(dollars in thousands)
Commercial
Commercial	$	45,907		$	51,679
Real estate - commercial		114,944			105,123
Other real estate construction loans		31,601			52,270
Noncommercial
Real estate 1 - 4 family construction		5,543			4,332
Real estate - residential		101,847			103,781
Home equity		51,413			52,034
Consumer loans		14,710			17,721
Other loans		602			739
		366,567			387,679
Less:
Allowance for loan losses		(6,815	)		(9,067	)
Deferred loan (fees) costs, net		108			90
Loans held for investment, net	$	359,860		$	378,702

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 41.81% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that comprise 31.36% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $33.1 million and $43.3 million at December 31, 2011 and 2010, respectively. The nonaccrual status of these loans had the effect of reducing net income by $571,722 in 2011 and $852,599 in 2010. Of the $33.1 million in impaired loans at December 31, 2011, $18.9 million were in the commercial segment and carried allowances totaling $1.1 million while $14.2 million were in the noncommercial segment and carried allowances totaling $1.5 million. The commercial segment had $14.9 million evaluated and required no specific allowance while the noncommercial segment had $8.5 million evaluated and required no specific allowance. Of the $43.3 million in impaired loans at December 31, 2010, $12.5 million were in the commercial segment and carried allowances totaling $3.6 million while $4.4 million were in the noncommercial segment and carried allowances totaling $1.0 million. The commercial segment had $19.5 million evaluated and required no specific allowance while the noncommercial segment had $6.8 million evaluated and required no specific allowance. There were no loans 90 past due and still accruing at December 31, 2011 and $407,223 at December 31, 2010.

Restructured loans at December 31, 2011 totaled $6.0 million of which all $6.0 million are included in the impaired loan total. The carrying value of foreclosed properties held as other real estate was $10.3 million and $2.0 million at December 31, 2011 and 2010, 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.

XML

Commitments And Contingencies

12 Months Ended

Dec. 31, 2011

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 13 - 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, 2011 and 2010, outstanding financial instruments whose contract amounts represent credit risk were as follows:

	2011		2010
	(dollars in thousands)
Commitments to extend credit	$	64,224	$	82,455
Credit card commitments		8,728		8,790
Standby letters of credit		1,540		1,626
	$	74,492	$	92,871

Contingencies

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

Financial Instruments with Concentration of Credit Risk

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

Although the Company's composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Banks' policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.