Exhibit 13

Uwharrie Capital Corp

2014

ANNUAL REPORT TO SHAREHOLDERS

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was incorporated on February 24, 1993 to become the bank holding company for Uwharrie Bank (the “Bank”), formerly, known as Bank of 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.

The Bank engages in retail and commercial banking, with six banking offices in Stanly County, North Carolina. The Bank 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 provided financial services to customers through one banking office in Anson County until September 1, 2013 when it was consolidated with and into the Bank. The former Anson office is now operated by the Bank.

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 the Bank to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into the Bank effective September 1, 2013. The former Cabarrus offices are now operated as branches of the Bank.

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 Bank include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts, all tailored to meet customers’ needs. The bank provides fixed and variable rate loans, which include mortgage, home equity, lines of credit, consumer and commercial loans. The bank also offers 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 SIPC. 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 OBLICATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.

Uwharrie Bank, Member FDIC, Equal Housing Lender.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

							Percent
							Increase
(Dollars in thousands, except per share amounts)	2014			2013			(Decrease)
For the year:
Net income	$	1,679		$	954			76.00	%
Net income (loss) available to common shareholders	$	1,088		$	151			620.53	%
Basic net income (loss) per common share (1)	$	0.15		$	0.02			665.00	%
Diluted net income (loss) per common share (1)	$	0.15		$	0.02			665.00	%
Weighted average common shares outstanding (diluted)		7,300,988			7,422,286			-1.63	%
At year-end:
Total assets	$	518,464		$	517,320			0.22	%
Total earning assets		473,157			472,075			0.23	%
Loans held for investment		310,853			307,348			1.14	%
Total interest-bearing liabilities		390,609			395,887			-1.33	%
Shareholders’ equity		42,262			40,509			4.33	%
Book value per common share (1)	$	4.55		$	3.94			15.45	%
Averages for the year:
Total assets	$	513,676		$	527,693			-2.66	%
Total earning assets		470,948			485,219			-2.94	%
Loans held for investment		309,338			317,274			-2.50	%
Total interest-bearing liabilities		386,237			407,857			-5.30	%
Shareholders’ equity		41,681			43,994			-5.26	%
Financial ratios (in percentage):
Return on average assets		0.33	%		0.18	%
Return on average shareholders’ equity		4.03	%		2.17	%
Average equity to average assets		8.11	%		8.34	%
Net interest margin (fully tax equivalent basis)		3.60	%		3.52	%
Allowance as % of loans at year-end		1.20	%		1.66	%
Allowance as % of nonperforming loans		166.43	%		108.02	%
Nonperforming loans to total loans		0.72	%		1.53	%
Nonperforming assets to total assets		1.56	%		2.30	%
Net loan charge-offs (recoveries) to average loans		0.31	%		0.55	%

(1) Net income per share, book value per share and shares outstanding at year-end for 2013 have been adjusted to reflect the 2% stock dividend in 2014.

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 OTCQB marketplace operated by OTC Markets Group Inc. 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 2014, Uwharrie Capital Corp declared a 2% stock dividend on its outstanding common stock. There was not a dividend declared in 2013. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

February 27, 2015

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and 2013

	2014			2013
	(dollars in thousands)
ASSETS
Cash and due from banks	$	6,807		$	7,947
Interest-earning deposits with banks		43,984			64,447
Securities available for sale, at fair value		112,824			100,280
Securities held to maturity, at amortized cost (fair value $5,450,000)		5,496			—
Loans held for sale		2,147			1,139
Loans:
Loans held for investment		310,853			307,348
Less allowance for loan losses		(3,738	)		(5,095	)
Net loans held for investment		307,115			302,253
Premises and equipment, net		14,858			13,781
Interest receivable		1,747			1,747
Restricted stock		1,038			1,184
Bank owned life insurance		6,645			6,516
Other real estate owned		5,865			7,170
Prepaid assets		969			490
Other assets		8,969			10,366
Total assets	$	518,464		$	517,320
LIABILITIES
Deposits:
Demand noninterest-bearing	$	80,069		$	74,493
Interest checking and money market accounts		243,116			228,933
Savings deposits		39,091			41,512
Time deposits, $100,000 and over		38,912			44,690
Other time deposits		55,247			64,080
Total deposits		456,435			453,708
Short-term borrowed funds		4,685			5,509
Long-term debt		9,558			11,163
Interest payable		180			224
Other liabilities		4,783			4,491
Total liabilities		475,641			475,095
Off balance sheet items, commitments and contingencies (Note 13)
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 17)		561			1,716
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,961,484 and 7,445,931		8,702			9,307
Additional paid-in capital		11,712			11,922
Unearned ESOP compensation		—			(989	)
Undivided profits		10,974			10,289
Accumulated other comprehensive income (loss)		305			(562	)
Total Uwharrie Capital shareholders’ equity		31,693			29,967
Noncontrolling interest		10,569			10,542
Total shareholders’ equity		42,262			40,509
Total liabilities and shareholders’ equity	$	518,464		$	517,320

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2014, 2013 and 2012

	2014			2013			2012
	(dollars in thousands, except share and per share data)
Interest Income
Loans, including fees	$	16,336		$	17,573		$	19,724
Investment securities:
US Treasury		361			397			581
US Government agencies and corporations		1,271			1,066			1,105
State and political subdivisions		321			252			324
Interest-earning deposits with banks and federal funds sold		168			177			137
Total interest income		18,457			19,465			21,871
Interest Expense
Interest checking and money market accounts		299			439			542
Savings deposits		57			171			197
Time deposits $100,000 and over		471			592			802
Other time deposits		526			708			1,008
Short-term borrowed funds		34			160			353
Long-term debt		573			664			796
Total interest expense		1,960			2,734			3,698
Net interest income		16,497			16,731			18,173
Provision for (recovery of) loan losses		(389	)		28			1,832
Net interest income after provision for loan losses		16,886			16,703			16,341
Noninterest Income
Service charges on deposit accounts		1,467			1,627			1,723
Other service fees and commissions		3,928			3,399			3,178
Gain (loss) on sale of securities (includes reclassification of ($2,000) and ($523,000) from accumulated comprehensive income)		(2	)		(523	)		1,286
Income from mortgage loan sales		1,001			2,113			3,740
Other income		927			971			748
Total noninterest income		7,321			7,587			10,675
Noninterest Expense
Salaries and employee benefits		12,051			12,423			12,891
Net occupancy expense		1,107			1,098			1,155
Equipment expense		680			734			733
Data processing costs		729			784			889
Office supplies and printing		273			358			334
Foreclosed real estate expense		1,246			1,647			2,994
Professional fees and services		847			680			588
Marketing and donations		762			728			691
Electronic banking expense		939			999			951
Software amortization and maintenance		535			541			576
FDIC insurance		425			518			693
Goodwill Impairment		—			—			987
Other noninterest expense		2,286			2,484			2,765
Total noninterest expense		21,880			22,994			26,247
Income before income taxes		2,327			1,296			769
Income taxes (includes reclassification of ($1,000 and $202,000) from accumulated other comprehensive income, respectively)		648			342			365
Net income	$	1,679		$	954		$	404
Consolidated net income	$	1,679		$	954		$	404
Less: Net income attributable to noncontrolling interest		(591	)		(478	)		—
Net income attributable to Uwharrie Capital Corp		1,088			476			404
Dividends on preferred stock		—			(325	)		(645	)
Net Income (loss) available to common shareholders	$	1,088		$	151		$	(241	)
Net income (loss) per common share
Basic	$	0.15		$	0.02		$	(0.03	)
Diluted	$	0.15		$	0.02		$	(0.03	)
Weighted average common shares outstanding
Basic		7,300,988			7,422,286			7,519,100
Diluted		7,300,988			7,422,286			7,519,100

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2014, 2013 and 2012

	2014			2013			2012
	(dollars in thousands)
Net Income	$	1,679		$	954		$	404
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		1,311			(3,662	)		2,356
Related tax effect		(445	)		1,292			(859	)
Reclassification of losses (gains) recognized in net income		2			523			(1,286	)
Related tax effect		(1	)		(202	)		496
Total other comprehensive income (loss)		867			(2,049	)		707
Comprehensive income (loss)		2,546			(1,095	)		1,111
Less: Comprehensive income attributable to noncontrolling interest		(591	)		(478	)		—
Comprehensive income (loss) attributable to Uwharrie Capital	$	1,955		$	(1,573	)	$	1,111

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2014, 2013 and 2012

	Number of 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)			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2011		7,593,929		$	10,000		$	500		$	(200	)	$	9,492		$	12,661		$	(772	)	$	10,379		$	2,194		$	—		$	44,254
Net Income		—			—			—			—			—			—			—			404			—			—			404
Repurchase of common stock		(90,260	)		—			—			—			(113	)		(191	)		—			—			—			—			(304	)
Retirement of common stock		(1,173	)		—			—			—			(1	)		1			—			—			—			—			—
Other comprehensive loss		—			—			—			—			—			—			—			—			(707	)		—			(707	)
Release of ESOP shares		—			—			—			—			—			(39	)		87			—			—			—			48
Increase in ESOP notes receivable		—			—			—			—			—			—			(190	)		—			—			—			(190	)
Reclass of redeemable ESOP stock		—			—			—			—			—			(235	)		—			—			—			—			(235	)
Stock compensation expense		—			—			—			—			—			4			—			—			—			—			4
Record preferred stock dividend and discount accretion		—			—			—			100			—			—			—			(645	)		—			—			(545	)
Balance, December 31, 2012		7,502,496		$	10,000		$	500		$	(100	)	$	9,378		$	12,201		$	(875	)	$	10,138		$	1,487		$	—		$	42,729
Net Income		—			—			—			—			—			—			—			476			—			478			954
Repurchase of common stock		(56,565	)		—			—			—			(71	)		(98	)		—			—			—			—			(169	)
Other comprehensive loss		—			—			—			—			—			—			—			—			(2,049	)		—			(2,049	)
Release of ESOP shares		—			—			—			—			—			(49	)		94			—			—			—			45
Increase in ESOP notes receivable		—			—			—			—			—			—			(208	)		—			—			—			(208	)
Reclass to mezzanine capital		—			—			—			—			—			(132	)		—			—			—			—			(132	)
Repayment of preferred stock series A		—			(10,000	)		(500	)		—			—			—			—			—			—			—			(10,500	)
Issuance of preferred stock (noncontrolling interest)		—			—			—			—			—			—			—			—			—			10,655			10,655
Record costs of preferred stock (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(137	)		(137	)
Record preferred stock dividend (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(454	)		(454	)
Record preferred stock dividend and discount accretion		—			—			—			100			—			—			—			(325	)		—			—			(225	)
Balance, December 31, 2013		7,445,931		$	—		$	—		$	—		$	9,307		$	11,922		$	(989	)	$	10,289		$	(562	)	$	10,542		$	40,509

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Continued

Years Ended December 31, 2014, 2013 and 2012

	Number of 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)			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2013		7,445,931		$	—	$	—	$	—	$	9,307		$	11,922		$	(989	)	$	10,289		$	(562	)	$	10,542		$	40,509
Net Income		—			—		—		—		—			—			—			1,088			—			591			1,679
Repurchase of common stock		(374,130	)		—		—		—		(468	)		(942	)		—			—			—			—			(1,410	)
2% stock dividend		142,129			—		—		—		178			221			—			(399	)		—			—			—
Cash paid – fractional shares		—			—		—		—		—			—			—			(4	)		—			—			(4	)
Other comprehensive income		—			—		—		—		—			—			—			—			867			—			867
Release of ESOP shares		—			—		—		—		—			5			16			—			—			—			21
Repayment of ESOP notes receivable		(252,446	)		—		—		—		(315	)		(649	)		973			—			—			—			9
Reclass from mezzanine capital		—			—		—		—		—			1,155			—			—			—			—			1,155
Record preferred stock dividend series B (noncontrolling interest)		—			—		—		—		—			—			—			—			—			(416	)		(416	)
Record preferred stock dividend series C (noncontrolling interest)		—			—		—		—		—			—			—			—			—			(148	)		(148	)
Balance, December 31, 2014		6,961,484		$	—	$	—	$	—	$	8,702		$	11,712		$	—		$	10,974		$	305		$	10,569		$	42,262

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

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2014, 2013 and 2012

	2014			2013			2012
	(dollars in thousands)
Cash flows from operating activities
Net income	$	1,679		$	954		$	404
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		922			914			954
Net amortization of security premiums/discounts AFS		1,050			1,420			1,334
Net amortization of security premiums/discounts HTM		2			—			—
Impairment of goodwill		—			—			987
Net amortization of mortgage servicing rights		709			801			831
Impairment of foreclosed real estate		647			921			2,365
Provision for (recovery of) loan losses		(389	)		28			1,832
Deferred income taxes		593			438			(1,134	)
Stock compensation		—			—			4
Net realized (gains) loss on sales / calls available for sale securities		2			523			(1,286	)
Income from mortgage loan sales		(1,001	)		(2,113	)		(3,740	)
Proceeds from sales of loans held for sale		39,012			77,544			126,189
Origination of loans held for sale		(39,019	)		(71,197	)		(125,864	)
Gain on sale of premises, equipment and other assets		(142	)		(233	)		(252	)
Increase in cash surrender value of life insurance		(129	)		(122	)		(223	)
Gain on sales of foreclosed real estate		(398	)		(290	)		55
Release of ESOP Shares		21			45			48
Net change in interest receivable		—			6			331
Net change in other assets		(663	)		(810	)		(3,655	)
Net change in interest payable		(44	)		(46	)		(31	)
Net change in other liabilities		349			424			431
Net cash provided (used) by operating activities		3,201			9,207			(420	)
Cash flows from investing activities
Proceeds from sales, maturities, calls and paydowns of securities available for sale		18,839			32,969			57,274
Purchase of securities available for sale		(31,122	)		(46,693	)		(61,369	)
Purchase of securities held to maturity		(5,498	)		—			—
Net (increase) decrease in loans		(5,445	)		16,282			32,739
Proceeds from sale of premises, equipment and other assets		368			949			5,169
Purchase of premises and equipment		(2,225	)		(488	)		(830	)
Proceeds from sales of foreclosed real estate		2,028			4,731			1,844
Investment in other assets		(366	)		(357	)		(346	)
Net change in restrictive stock		146			1,081			1,024
Net cash provided (used) by investing activities		(23,275	)		8,474			35,505
Cash flows from financing activities
Net increase (decrease) in deposit accounts		2,727			(3,904	)		26,274
Net decrease in short-term borrowed funds		(824	)		(13,181	)		(2,101	)
Net decrease in long-term debt		(1,605	)		(1,510	)		(12,560	)
Proceeds from preferred stock offering, net of costs		—			3,136			7,382
Repayment preferred stock, series A		—			(10,500	)		—
Increase in unearned ESOP compensation		—			(208	)		(190	)
Repurchase of common stock, net		(1,401	)		(169	)		(304	)
Dividend and discount accretion on preferred stock		(422	)		(679	)		(545	)
Cash paid for fractional shares		(4	)		—			—
Net cash provided (used) by financing activities		(1,529	)		(27,015	)		17,956
Increase (decrease) in cash and cash equivalents		(21,603	)		(9,334	)		53,041
Cash and cash equivalents, beginning of year		72,394			81,728			28,687
Cash and cash equivalents, end of year	$	50,791		$	72,394		$	81,728
Supplemental disclosures of cash flow information
Interest paid	$	2,004		$	2,780		$	3,729
Income taxes paid		41			648			270
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		867			(2,049	)		(707	)
Loans transferred to foreclosed real estate		972			4,032			2,907
Company financed sales of other real estate owned		(65	)		(213	)		(188	)
Mortgage servicing rights capitalized		386			763			1,237
Preferred stock dividend accrued		(142	)		(142	)		(68	)
Net change in ESOP liability		1,155			132			235

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

40

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. On September 1, 2013, Bank of Stanly changed its name to Uwharrie Bank (“Uwharrie”).

Uwharrie 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 Uwharrie are insured by the Federal Deposit Insurance Corporation (“FDIC”). Uwharrie is under regulation of the Federal Reserve, the FDIC and the North Carolina Commissioner of Banks. Through its six branch locations in Stanly County, Uwharrie provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

In 1987, Uwharrie established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Uwharrie 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 1998 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. Anson was consolidated into Uwharrie Bank effective September 1, 2013.

On August 4, 2000, Uwharrie 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 Uwharrie to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into Uwharrie Bank effective September 1, 2013.

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

41

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 (“GAAP”), 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 United States Treasuries, United States Government agencies, Government Sponsored Enterprise (GSE) mortgage backed securities and collateralized mortgage obligations (CMOs), corporate bonds and state and political subdivision bonds. 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. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the period to maturity.

Investment Securities Held to Maturity

Investment securities held to maturity consist of United States Government agencies, and corporate bonds. The Company has both the intent and ability to hold the securities to maturity. These securities are reported at amortized cost.

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

42

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 effective 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. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

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. The provision for loan losses is expensed 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 Company has different specific risks identified within the loan segments. Specific risks within the commercial loan segment arise with borrowers that are experiencing diminished operating cash flows, depreciated collateral values or prolonged sales and rental absorption periods. Concentrations within the portfolio if unmanaged, pose additional risk. Occasionally, the Company will purchase participation loans from other institutions and if not independently underwritten by the Bank, could carry additional risk. Generally, owner-occupied commercial real estate loans carry less risk than non-owner occupied. Specific risks within the non-commercial portfolio tend to be tied to economic factors including high unemployment and decreased real estate values. Risk to the Company is greater as home values deteriorate more rapidly than amortization in a loan, leaving little to no equity in properties, especially in junior lien positions. Concentration in the portfolio, such as home equity lines of credit, could pose additional risk if not appropriately managed.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management. Loans are collectively evaluated 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. Individually evaluated loans are based upon discounted cash flows or the underlying value of the collateral. 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.

43

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

Troubled debt restructure loans (TDR) are modifications of a loan when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. TDRs are considered to be impaired loans and are individually evaluated for impairment.

The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components, as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

Mortgage Servicing Rights

The Company capitalizes mortgage servicing rights when loans are 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 is expected to be received based on projections of the amount and timing of estimated future cash flows. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are periodically evaluated for impairment based upon their fair value. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance and charged to other expense.

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.

44

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 less costs to sell. Annually, 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.

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 bank invests 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.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and 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. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold. The tax returns for the Company are subject to audit for the 2011 fiscal year and thereafter. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of other expenses in the income statement; however, if interest becomes a material amount, it would be reclassified as interest expense. There were no interest or penalties accrued during the years ended December 31, 2014, 2013 and 2012.

45

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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 other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; 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 securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected

46

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

repayments or fair value of collateral exceed the recorded investments in such loans. 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 internal assessment of fair value based upon market data issued 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 the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued 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.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. These loans are recorded in Level 2

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions. Servicing assets are recorded in Level 3.

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. The following table presents the changes in accumulated other comprehensive income for the years ended December 31, 2014 and 2013:

	Year ended December 31,
	2014			2013
	(dollars in thousands)
Beginning balance	$	(562	)	$	1,487
Other comprehensive income (loss) before reclassifications, net of $(445,000) and $1,292,000 tax effect		866			(2,370	)
Amounts reclassified from accumulated other comprehensive income, net of $1,000 and $202,000 tax effect		1			321
Net current-period other comprehensive income (loss)		867			(2,049	)
Ending Balance	$	305		$	(562	)

47

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

As of December 31, 2014 and December 31, 2013, total accumulated other comprehensive income (loss) was $305,000 and ($562,000), respectively.

Earnings per Common Share

The Company had stock options outstanding covering 12,607 shares of common stock at December 31, 2014 and 94,341 shares of common stock at both December 31, 2013 and 2012. 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:

	2014			2013			2012
Weighted average number of common shares used in computing basic net income per common share		7,343,921			7,633,365			7,652,546
Effect of ESOP shares		(42,933	)		(211,079	)		(133,446	)
Adjusted weighted average number of common shares used in computing basic net income per common share		7,300,988			7,422,286			7,519,100
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		7,300,988			7,422,286			7,519,100

During the first quarter of 2014, the board of directors of the Company voted to terminate the ESOP effective March 1, 2014. As of February 28, 2014, the ESOP held 740,530 shares, or 9.95% of the Company’s total outstanding shares of common stock, of which 252,446 shares were unallocated to participants in the ESOP.

The Company originally made a term loan to the ESOP in 1999. In addition, the Company established a $500,000 line of credit to the ESOP in 2010 and established a second $500,000 line of credit to the ESOP in 2013. The ESOP used the proceeds of the term loan and lines of credit to purchase shares of the Company’s common stock for the benefit of qualified employees. The unallocated shares of stock held by the ESOP were pledged as collateral for the term loan and lines of credit. As debt payments were made on the term loan and lines of credit, unallocated shares associated with those debt payments were released to the ESOP and allocated among participants.

48

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

In connection with the termination of the ESOP, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company in partial satisfaction of the outstanding balance on the term loan and lines of credit. The fair value of these unallocated shares was insufficient to repay the term loan and lines of credit in full. As a result, the Company forgave the remaining balance. Upon the transfer of the unallocated shares to the Company, these shares were cancelled and returned to the Company’s pool of authorized but unissued shares of common stock.

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter of 2014 distributed the allocated shares to the participants.

Noncontrolling Interest

In January 2013 the Company’s subsidiary banks issued a total of $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualified as Tier 1 capital at each bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. This capital is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, an update to ASC 310 “Receivables – Trouble Debt Restructurings by Creditors”. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The adoption of this update will not have a significant impact on the Company’s financial statements except for added disclosures.

49

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 2013 financial statements have been reclassified to conform to the 2014 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

Note 2 - Investment Securities

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

December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	19,030	$	362	$	6	$	19,386
U.S. Government agencies		50,969		96		290		50,775
GSE - Mortgage-backed securities and CMO’s		27,748		133		309		27,572
State and political subdivisions		11,575		505		—		12,080
Corporate bonds		3,040		—		29		3,011
Total securities available for sale	$	112,362	$	1,096	$	634	$	112,824
December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	2,085	$	—	$	32	$	2,053
Corporate bonds		3,411		—		14		3,397
Total securities held to maturity	$	5,496	$	—	$	46	$	5,450
December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	20,992	$	502	$	208	$	21,286
U.S. Government agencies		40,245		150		809		39,586
GSE - Mortgage-backed securities and CMO’s		32,557		116		953		31,720
State and political subdivisions		7,337		351		—		7,688
Total securities available for sale	$	101,131	$	1,119	$	1,970	$	100,280

At both December 31, 2014 and 2013, the Company owned Federal Reserve Bank stock reported at cost of $506,000 and $467,000, respectively. Also at December 31, 2014 and 2013, the Company owned Federal Home Loan Bank Stock (FHLB) of $532,000 and $717,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks.

50

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

Results from sales and calls of securities available for sale for the years ended December 31, 2014, 2013 and 2012 are as follows:

	2014			2013			2012
	(dollars in thousands)
Gross proceeds from sales and calls	$	11,592		$	20,182		$	42,889
Realized gains from sales	$	28		$	41		$	1,398
Realized losses from sales		(30	)		(564	)		(112	)
Net realized gains (losses)	$	(2	)	$	(523	)	$	1,286

At December 31, 2014, 2013 and 2012 securities available for sale with a carrying amount of $84.7 million, $63.1 million and $48.8 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, 2014 and 2013. The 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, 2014, the unrealized losses on available for sale securities related to one United States Treasury note, thirteen government agency securities, eight government sponsored enterprise (GSE) mortgage backed securities and two corporate bonds. At December 31, 2014, the unrealized losses on held to maturity securities related to one government agency security and two corporate bonds. At December 31, 2013 the unrealized losses related to one United States Treasury note, thirteen government agency securities and ten government sponsored enterprise (GSE) mortgage backed securities.

	Less than 12 Months				12 Months or More				Total
December 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	3,143	$	6	$	—	$	—	$	3,143	$	6
U.S. Gov’t agencies		9,690		23		17,776		267		27,466		290
GSE-Mortgage-backed securities and CMO’s		1,990		4		14,168		305		16,158		309
Corporate bonds		3,011		29		—		—		3,011		29
Total securities available for sale	$	17,834	$	62	$	31,944	$	572	$	49,778	$	634
	Less than 12 Months				12 Months or More				Total
December 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Held to maturity temporary impairment
U.S. Gov’t agencies	$	2,053	$	32	$	—	$	—	$	2,053	$	32
Corporate bonds		3,397		14		—		—		3,397		14
Total securities held to maturity	$	5,450	$	46	$	—	$	—	$	5,450	$	46

51

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

	Less than 12 Months				12 Months or More				Total
December 31, 2013	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	4,722	$	208	$	—	$	—	$	4,722	$	208
U.S. Gov’t agencies		32,406		809		—		—		32,406		809
GSE-Mortgage-backed securities and CMO’s		18,947		809		3,849		144		22,796		953
Total securities available for sale	$	56,075	$	1,826	$	3,849	$	144	$	59,924	$	1,970

The Company did have seven government agency securities and seven GSE mortgage backed securities that had been in a loss position for more than twelve months. 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, 2014, the Company does not intend to sell and is 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 entire investment portfolio as of December 31, 2014:

	Amortized		Estimated
	Cost		Fair Value
	(dollars in thousands)
Due within one year	$	5,147	$	5,175
Due after one but within five years		57,711		58,043
Due after five but within ten years		21,537		21,603
Due after ten years		5,715		5,881
Mortgage backed securities		27,748		27,572
	$	117,858	$	118,274

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

52

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2014 and 2013 is as follows:

	2014			2013
	(dollars in thousands)
Commercial
Commercial	$	47,418		$	47,436
Real estate – commercial		92,517			95,922
Other real estate construction loans		22,362			17,583
Noncommercial
Real estate 1 – 4 family construction		3,888			3,418
Real estate – residential		89,374			87,463
Home equity		46,360			45,231
Consumer loans		8,460			9,623
Other loans		481			612
		310,860			307,288
Less:
Allowance for loan losses		(3,738	)		(5,095	)
Deferred loan (fees) costs, net		(7	)		60
Loans held for investment, net	$	307,115		$	302,253

Although the subsidiary bank loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily 1 to 4 family residential mortgage loans, which represent 44.91% 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 represent 52.21% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $7.6 million and $17.6 million at December 31, 2014 and 2013, respectively. There were no loans 90 days past due and still accruing at December 31, 2014 or at December 31, 2013.

Restructured loans at December 31, 2014 totaled $6.0 million and are included in the impaired loan total, compared to $6.4 million of which all $6.4 million were included in impaired loans at December 31, 2013. The carrying value of foreclosed properties held as other real estate was $5.9 million and $7.2 million at December 31, 2014 and 2013, respectively.

The Company had loans of $128.9 million and $150.4 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2014 and 2013, 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.

53

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2014, 2013 and 2012 are presented below:

Commercial	2014			2013			2012
	(dollars in thousands)
Balance, beginning of year	$	2,665		$	2,791		$	2,904
Provision (recovery) charged to operations		(302	)		784			985
Charge-offs		(749	)		(1,005	)		(1,167	)
Recoveries		102			96			69
Net (charge-offs)		(647	)		(909	)		(1,098	)
Other		—			(1	)		—
Balance, end of year	$	1,716		$	2,665		$	2,791
Non-Commercial	2014			2013			2012
	(dollars in thousands)
Balance, beginning of year	$	2,430		$	4,010		$	3,911
Provision (recovery) charged to operations		(87	)		(756	)		847
Charge-offs		(482	)		(966	)		(824	)
Recoveries		161			146			76
Net (charge-offs)		(321	)		(820	)		(748	)
Other		—			(4	)		—
Balance, end of year	$	2,022		$	2,430		$	4,010
Total	2014			2013			2012
	(dollars in thousands)
Balance, beginning of year	$	5,095		$	6,801		$	6,815
Provision (recovery) charged to operations		(389	)		28			1,832
Charge-offs		(1,231	)		(1,971	)		(1,991	)
Recoveries		263			242			145
Net (charge-offs)		(968	)		(1,729	)		(1,846	)
Other		—			(5	)		—
Balance, end of year	$	3,738		$	5,095		$	6,801

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2014 and 2013:

December 31, 2014
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	179	$	2,125	$	1,537	$	160,172	$	1,716	$	162,297
Non-Commercial		277		5,436		1,745		143,120		2,022		148,556
Total	$	456	$	7,561	$	3,282	$	303,292	$	3,738	$	310,853
December 31, 2013
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	1,519	$	8,700	$	1,146	$	152,241	$	2,665	$	160,941
Non-Commercial		868		8,853		1,562		137,554		2,430		146,407
Total	$	2,387	$	17,553	$	2,708	$	289,795	$	5,095	$	307,348

54

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The Company made two changes made to the allowance for loan loss general reserve during 2014. First, the process of assigning the probability of default to commercial loans was changed to be based on internally determined loan grades instead of the beacon credit scores of the related underlying individual guarantor or borrower. Second, it was decided that a more accurate and stable measure of the risk in the portfolio would be achieved by a “through the cycle” probability of default or the likelihood that the borrower would pay as agreed. The probabilities of default are sampled from the prior two years making the previous method of estimating default a severely lagging statistic. These changes increased the Allowance by approximately $1.3 million. Management believes these better quantify probable losses within the loan portfolio.

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

December 31, 2014
	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	42	$	—	$	42	$	47,376	$	47,418	$	—
Real estate – commercial		77		794		871		91,646		92,517		—
Other real estate construction		—		342		342		22,020		22,362		—
Real estate construction		—		—		—		3,888		3,888		—
Real estate – residential		1,673		1,097		2,770		86,597		89,367		—
Home equity		89		13		102		46,258		46,360		—
Consumer loan		123		—		123		8,337		8,460		—
Other loans		—		—		—		481		481		—
Total	$	2,004	$	2,246	$	4,250	$	306,603	$	310,853	$	—
December 31, 2013
	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
			(dollars in thousands)
Commercial	$	143	$	204	$	347	$	47,089	$	47,436	$	—
Real estate – commercial		165		1,064		1,229		94,693		95,922		—
Other real estate construction		145		1,637		1,782		15,801		17,583		—
Real estate construction		—		—		—		3,418		3,418		—
Real estate – residential		1,426		1,564		2,990		84,533		87,523		—
Home equity		207		248		455		44,776		45,231		—
Consumer loan		55		—		55		9,568		9,623		—
Other loans		—		—		—		612		612		—
Total	$	2,141	$	4,717	$	6,858	$	300,490	$	307,348	$	—

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 accrual status 90 days or more until they are paid current or charged off.

55

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The composition of nonaccrual loans by class as of December 31, 2014 and 2013 is as follows:

	2014		2013
	(dollars in thousands)
Commercial	$	—	$	204
Real estate – commercial		794		1,064
Other real estate construction		342		1,637
Real estate 1-4 family construction		—		—
Real estate – residential		1,097		1,564
Home equity		13		248
Consumer loans		—		—
Other loans		—		—
	$	2,246	$	4,717

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.

56

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2014 and 2013:

December 31, 2014
					Sub-
	Pass		Watch		standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	46,734	$	614	$	70	$	—	$	47,418
Real estate – commercial		82,846		5,513		4,158		—		92,517
Other real estate construction		19,724		1,925		713		—		22,362
Real estate 1-4 family construction		3,888		—		—		—		3,888
Real estate – residential		75,859		10,090		3,418		—		89,367
Home equity		44,799		1,458		103		—		46,360
Consumer loans		8,175		277		8		—		8,460
Other loans		481		—		—		—		481
Total	$	282,506	$	19,877	$	8,470	$	0	$	310,853
December 31, 2013
					Sub-
	Pass		Watch		standard		Doubtful		Total
			(dollars in thousands)
Commercial	$	46,520	$	635	$	281	$	—	$	47,436
Real estate – commercial		80,679		9,396		5,847		—		95,922
Other real estate construction		12,898		2,465		1,385		835		17,583
Real estate 1-4 family construction		3,418		—		—		—		3,418
Real estate – residential		70,407		12,911		4,205		—		87,523
Home equity		43,830		1,005		396		—		45,231
Consumer loans		9,216		361		46		—		9,623
Other loans		612		—		—		—		612
Total	$	267,580	$	26,773	$	12,160	$	835	$	307,348

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2014, nonperforming loans decreased from $4.7 million at December 31, 2013 to $2.2 million at December 31, 2014, a decrease of $2.5 million. There were several loans that were foreclosed on during 2014 with the related property being moved into other real estate owned.

57

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2014 and 2013:

December 31, 2014
			Non-
	Performing		Performing		Total
	(dollars in thousands)
Commercial	$	47,418	$	—	$	47,418
Real estate – commercial		91,723		794		92,517
Other real estate construction		22,020		342		22,362
Real estate 1-4 family construction		3,888		—		3,888
Real estate – residential		88,270		1,097		89,367
Home equity		46,347		13		46,360
Consumer loans		8,460		—		8,460
Other loans		481		—		481
Total	$	308,607	$	2,246	$	310,853
December 31, 2013
			Non-
	Performing		Performing		Total
	(dollars in thousands)
Commercial	$	47,232	$	204	$	47,436
Real estate – commercial		94,858		1,064		95,922
Other real estate construction		15,946		1,637		17,583
Real estate 1-4 family construction		3,418		—		3,418
Real estate – residential		85,959		1,564		87,523
Home equity		44,983		248		45,231
Consumer loans		9,623		—		9,623
Other loans		612		—		612
Total	$	302,631	$	4,717	$	307,348

58

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

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 valuation analysis is performed 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, 2014 and 2013 (unpaid principal balance was grossed up for chargeoffs):

									Year ended
	As of December 31, 2014								December 31, 2014
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
			(dollars in thousands)
Commercial	$	98	$	68	$	30	$	30	$	117	$	7
Real estate – commercial		1,820		1,242		389		145		2,641		73
Other real estate construction		934		342		54		4		1,108		6
Real estate 1 -4 family construction		20		—		20		1		109		1
Real estate – residential		5,298		1,865		3,433		257		5,865		268
Home equity		49		30		19		19		73		2
Consumer loans		69		29		40		—		83		4
Other loans		—		—		—		—		—		—
Total	$	8,288	$	3,576	$	3,985	$	456	$	9,996	$	361

									Year ended
	As of December 31, 2013								December 31, 2013
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
			(dollars in thousands)
Commercial	$	377	$	291	$	86	$	67	$	845	$	21
Real estate – commercial		6,808		3,962		2,375		507		7,089		328
Other real estate construction		2,034		247		1,739		945		2,078		17
Real estate 1 -4 family construction		374		25		349		16		380		23
Real estate – residential		8,197		4,619		3,329		530		8,507		300
Home equity		415		58		357		279		819		8
Consumer loans		116		61		55		43		156		14
Other loans		—		—		—		—		—		—
Total	$	18,321	$	9,263	$	8,290	$	2,387	$	19,874	$	711

									Year ended
	As of December 31, 2012								December 31, 2012
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
			(dollars in thousands)
Commercial	$	1,977	$	388	$	1,470	$	616	$	1,440	$	66
Real estate – commercial		11,299		6,341		2,895		411		11,607		473
Other real estate construction		3,935		2,437		1,448		401		4,055		202
Real estate 1 -4 family construction		840		713		127		127		1,053		43
Real estate – residential		8,985		3,994		4,991		1,215		11,442		427
Home equity		1,068		521		547		159		1,200		32
Consumer loans		235		39		196		105		308		14
Other loans		—		—		—		—		—		—
Total	$	28,339	$	14,433	$	11,674	$	3,034	$	31,105	$	1,257

59

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debt 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 TDRs are typically already on nonaccrual status and in some cases, partial chargeoffs may have 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, 2014, 2013 and 2012, the following table presents a breakdown of the types of concessions made by loan class:

	Year ended December 31, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate – commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		1		32		32
Other loans		—		—		—
		1	$	32	$	32
Other:
Commercial		—	$	—	$	—
Real estate – commercial		3		424		424
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate – residential		6		870		870
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		9	$	1,294	$	1,294
Total		10	$	1,326	$	1,326

60

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debt Restructures (Continued)

	Year ended December 31, 2013
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate – commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
		—	$	—	$	—
Other:
Commercial		—	$	—	$	—
Real estate – commercial		1		356		341
Other real estate construction		—		—		—
Real estate 1-4 family construction		—		—		—
Real estate – residential		8		895		875
Home equity		1		18		18
Consumer loans		—		—		—
Other loans		—		—		—
		10	$	1,269	$	1,234
Total		10	$	1,269	$	1,234

61

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debt Restructures (Continued)

	Year ended December 31, 2012
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		1	$	33	$	32
Real estate – commercial		—		—		—
Other real estate construction		1		49		49
Real estate 1-4 family construction		—		—		—
Real estate – residential		2		30		30
Home equity		—		—		—
Consumer loans		1		45		42
Other loans		—		—		—
		5	$	157	$	153
Other:
Commercial		1	$	68	$	68
Real estate – commercial		1		116		112
Other real estate construction		—		—		—
Real estate 1-4 family construction		1		32		31
Real estate – residential		6		939		933
Home equity		—		—		—
Consumer loans		1		17		17
Other loans		—		—		—
		10	$	1,172	$	1,161
Total		15	$	1,329	$	1,314

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, 2014, 2013 and 2012:

	Year ended				Year ended
	December 31, 2014				December 31, 2013
	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Income
Extend payment terms:
Commercial		—	$	—		—	$	—
Real estate – commercial		—		—		—		—
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate – residential		—		—		—		—
Home equity		—		—		—		—
Consumer loans		—		—		—		—
Other loans		—		—		—		—
Total	$	—	$	—	$	—	$	—

62

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debt Restructures (Continued)

	Year ended December 31, 2014				Year ended December 31, 2013
	Number of Loans		Recorded Investment		Number of Loans		Recorded Income
Other:
Commercial		—	$	—		—	$	—
Real estate – commercial		—		—		—		—
Other real estate construction		—		—		—		—
Real estate 1-4 family construction		—		—		—		—
Real estate – residential		—		—		—		—
Home equity		—		—		—		—
Consumer loans		—		—		—		—
Other loans		—		—		—		—
	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

	Year ended December 31, 2012
	Number of Loans		Recorded Investment
Extend payment terms:
Commercial		1	$	31
Real estate – commercial		—		—
Other real estate construction		1		49
Real estate 1-4 family construction		—		—
Real estate – residential		2		30
Home equity		—		—
Consumer loans		—		—
Other loans		—		—
Total	$	4	$	110
Other:
Commercial		—	$	—
Real estate – commercial		—		—
Other real estate construction		—		—
Real estate 1-4 family construction		—		—
Real estate – residential		1		238
Home equity		—		—
Consumer loans		1		17
Other loans		—		—
	$	2	$	255
Total	$	6	$	365

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 previously mentioned, the Company considers TDRs to be impaired loans and has $373,000 in the allowance for loan loss as of December 31, 2014, as a direct result of these TDRs. At December 31, 2013 there was $420,000 in the allowance for loan loss related to TDRs.

63

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 - Troubled Debt Restructures (Continued)

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2014, 2013 and 2012:

	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)
December 31, 2014
Extended payment terms		—	$	—		1	$	32		—	$	—		—	$	—
Other		1		112		8		1,182		—		—		—		—
Total		1	$	112		9	$	1,214		—	$	—		—	$	—
	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)
December 31, 2013
Extended payment terms		—	$	—		—	$	—		—	$	—		—	$	—
Other		—		—		10		1,234		—		—		—		—
Total		—	$	—		10	$	1,234		—	$	—		—	$	—
	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
December 31, 2012
Extended payment terms		—	$	—		—	$	—		—	$	—		4	$	110
Other		—		—		9		949		—		—		2		255
Total		—	$	—		9	$	949		—	$	—		6	$	365

Note 6 - Mortgage Servicing Assets

The principal balance of 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 $396 million and $406 million at December 31, 2014 and 2013, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

	2014			2013			2012
	(dollars in thousands)
Beginning of year mortgage servicing rights:	$	2,356		$	2,394		$	2,142
Amounts capitalized		386			763			1,237
Amortization		(709	)		(801	)		(908	)
Impairment		39			—			(77	)
End of year	$	2,072		$	2,356		$	2,394

64

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 - Mortgage Servicing Assets (Continued)

Amortization expense is estimated as follows:

Year ending December 31,
(dollars in thousands)
2015	$	489
2016		424
2017		358
2018		292
2019		226
Thereafter		283
Total	$	2,072

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

The fair value of mortgage servicing rights was $3.2 million at December 31, 2014 and $3.1 million at December 31, 2013. The key assumptions used to value mortgage servicing rights were as follows:

	2014			2013
Weighted average remaining life		256 months			260 months
Weighted average discount rate		10	%		12	%
Weighted average coupon		3.98	%		4.01	%
Weighted average prepayment speed		187	%		187	%

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2014 and 2013 are listed below:

	2014		2013
	(dollars in thousands)
Land	$	3,302	$	3,454
Building and improvements		12,701		11,096
Furniture and equipment		8,439		7,937
Total fixed assets		24,442		22,487
Less accumulated depreciation		9,584		8,706
Net fixed assets	$	14,858	$	13,781

Note 8 - Leases

The Company’s subsidiary, Uwharrie Bank had entered into a noncancelable operating lease for an administrative office location in Concord that would have expired in 2017. The lease requires annual rental payments of $62,120 and contained two five-year renewal options at the expiration of the initial term. During 2014, the Company purchased this location.

Total rental expense related to the operating leases was $16,230, $61,914, and $60,929 for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in occupancy expense.

65

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 - Deposits

The composition of deposits at December 31, 2014 and 2013 is as follows:

	2014					2013
	Amount		Percentage of Total			Amount		Percentage of Total
	(dollars in thousands)
Demand noninterest-bearing	$	80,069		18	%	$	74,493		16	%
Interest checking and money market		243,116		53	%		228,933		51	%
Savings		39,091		9	%		41,512		9	%
Time deposits $250,000 and over		9,865		2	%		11,083		2	%
Other time deposits		84,294		18	%		97,687		22	%
Total	$	456,435		100	%	$	453,708		100	%

The maturities of fixed-rate time deposits at December 31, 2014 are reflected in the table below:

Year ending December 31,	Time Deposits $250,000 and Over		Other Time Deposits
	(dollars in thousands)
2015	$	4,452	$	49,311
2016		3,537		26,405
2017		1,876		6,605
2018		—		956
2019		—		875
Thereafter		—		142
Total	$	9,865	$	84,294

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 2014 and 2013:

	2014					2013
	Amount		Rate			Amount		Rate
	(dollars in thousands)
At year-end
Master notes and other short term borrowing	$	3,674		0.25	%	$	3,998		0.25	%
Notes payable		11		6.00	%		11		6.00	%
Short-term line of credit		1,000		3.75	%		—		0.00	%
Short-term advances from FHLB		—		0.00	%		1,500		4.80	%
	$	4,685		1.01	%	$	5,509		1.30	%
	2014					2013
	Amount		Rate			Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	2		0.79	%	$	4		0.79	%
Master notes and other short term borrowing		4,250		0.44	%		5,617		0.41	%
Notes payable		11		6.00	%		10		6.00	%
Short-term line of credit		57		3.75	%		—		0.00	%
Short-term advances from FHLB		510		4.08	%		5,026		2.61	%
	$	4,830		0.88	%	$	10,657		1.34	%

66

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 - Short-Term Borrowed Funds (Continued)

	2014		2013
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	—	$	—
Master notes and other short term borrowing		4,640		6,736
Notes payable		11		11
Short-term line of credit		1,000		—
Short-term advances from FHLB		1,500		9,500

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 bank, where an agreement is in place.

The Company has a short term line of credit with $1.0 million outstanding at December 31, 2014. The line of credit has an interest rate of 3.75% and matures March 10, 2015. This line is collateralized by Uwharrie Bank Stock.

The subsidiary bank has combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $36.1 million at December 31, 2014.

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 and commercial real estate loans with eligible collateral value of $67.0 million with remaining availability of $55.5 million at December 31, 2014. There were no long-term advances under this line at December 31, 2014 and at December 31, 2013. The subsidiary bank also has standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The aggregate amount of the letters of credit was $11.5 million at December 31, 2014.

During the second and third quarters of 2010, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $11.1 million, of which the entire $11.1 million was outstanding at December 31, 2013. These securities had a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt paid interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have had a twenty percent reduction beginning at March 31, 2014. On March 31, 2014, the Company called its entire $11.1 million of this subordinated debt.

During the first quarter of 2014, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $9.5 million, of which the entire $9.5 million was outstanding at December 31, 2014. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity

67

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 - Long-Term Debt (Continued)

drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have a twenty percent reduction beginning at March 31, 2019.

These two events resulted in a net reduction of $1.6 million in the outstanding junior subordinated debt securities and in total long term borrowings at December 31, 2014.

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 $35,738 at December 31, 2014 down from $46,301 at December 31, 2013.

As of December 31, 2014, the scheduled maturities of these long term borrowings are as follows:

Year ending December 31,
(dollars in thousands)
2016	$	12
2017		12
2018		—
2019		—
2020		—
Thereafter		9,534
Total	$	9,558

Note 12 - Income Tax Matters

The significant components of income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012 are summarized as follows:

	2014		2013			2012
	(dollars in thousands)
Current tax expense (benefit):
Federal	$	11	$	(98	)	$	1,243
State		44		2			256
Total		55		(96	)		1,499
Deferred tax expense (benefit):
Federal		458		285			(946	)
State		135		153			(188	)
Total		593		438			(1,134	)
Net provision for income taxes	$	648	$	342		$	365

68

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 - Income Tax Matters (Continued)

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:

	2014			2013			2012
	(dollars in thousands)
Tax computed at the statutory federal rate	$	791		$	441		$	262
Increases (decrease) resulting from:
Tax exempt interest, net		(252	)		(229	)		(250	)
State income taxes, net of federal benefit		118			102			45
Impairment of goodwill		—			—			336
Other		(9	)		28			(28	)
Provision for income taxes	$	648		$	342		$	365

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, 2014, 2013 and 2012 are as follows:

	2014			2013			2012
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	1,395		$	1,934		$	2,514
Deferred compensation		975			853			696
Other		701			856			1,030
Net unrealized loss on securities available for sale		—			289			—
Total deferred tax assets		3,071			3,932			4,240
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		(157	)		—			(801	)
Premises and equipment		(371	)		(487	)		(651	)
Deferred loans fees and costs		(198	)		(199	)		(187	)
Loan servicing		(182	)		(201	)		(208	)
Total deferred tax liabilities		(908	)		(887	)		(1,847	)
Net recorded deferred tax asset	$	2,163		$	3,045		$	2,393

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 bank is party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its 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.

69

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 - Commitments and Contingencies (Continued)

The subsidiary bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does 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, 2014 and 2013, outstanding financial instruments whose contract amounts represent credit risk were as follows:

	2014		2013
	(dollars in thousands)
Commitments to extend credit	$	75,573	$	67,865
Credit card commitments		8,754		8,016
Standby letters of credit		2,224		1,100
	$	86,551	$	76,981

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

Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Bank’s 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 collectability. 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, 2013	$	12,667
Disbursements during the year		12,901
Collections during the year		(3,848	)
Balance at December 31, 2014	$	21,720

70

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 - Related Party Transactions (Continued)

At December 31, 2014, the Company had approved, but unused lines of credit, totaling $4.5 million to executive officers and directors, and their related interests.

Note 15 – Shareholders’ Equity and Regulatory Matters

The Company and its banking subsidiary 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 bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measures 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, 2014
Total Capital to Risk
Weighted Assets:
Consolidated	$	55,229		16.1	%	$	27,469		8.0	%	$	N/A		—	%
Uwharrie Bank		54,933		16.1	%		27,362		8.0	%		34,202		10.0	%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated		41,957		12.2	%		13,735		4.0	%		N/A		—	%
Uwharrie Bank		51,195		15.0	%		13,681		4.0	%		20,521		6.0	%
Tier 1 Capital to
Average Assets:
Consolidated		41,957		8.1	%		20,765		4.0	%		N/A		—	%
Uwharrie Bank		51,195		9.9	%		20,716		4.0	%		25,895		5.0	%

71

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, 2013
Total Capital to Risk
Weighted Assets:
Consolidated	$	56,439		16.7	%	$	27,071		8.0	%	$	N/A		—	%
Uwharrie Bank		54,503		16.2	%		26,955		8.0	%		33,694		10.0	%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated		41,071		12.1	%		13,536		4.0	%		N/A		—	%
Uwharrie Bank		50,280		15.0	%		13,478		4.0	%		20,216		6.0	%
Tier 1 Capital to
Average Assets:
Consolidated		41,071		7.8	%		21,126		4.0	%		N/A		—	%
Uwharrie Bank		50,280		9.6	%		21,067		4.0	%		26,334		5.0	%

As of December 31, 2014, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company’s subsidiary bank 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 categorization.

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 under the capital purchase program (“CPP”). 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 a 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 holder to repurchase its common stock or to pay a cash dividend.

The Senior Preferred qualified as Tier 1 capital and paid 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 qualified as Tier 1 capital and paid 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 was amortized over five years.

72

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

During the fourth quarter of 2013, the Company repaid the entire $10.5 million of Series A and Series B Fixed Rate Cumulative Perpetual Preferred Stock, at par, to the United States Department of Treasury.

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at the subsidiary bank and pays dividends at a rate of 5.30%. The sale ended on December 31, 2012 raising $7.9 million less issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The offering ended September 15, 2013 with Uwharrie raising $2.8 million in new capital less total issuance costs of $23,000.

The total net amount of capital raised from Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C issues at the subsidiary bank level is presented as noncontrolling interest in the consolidated balance sheets.

All of the Company’s aforementioned investment in its subsidiary bank qualifies for Tier 1 capital treatment for the bank and is included as such in its year end capital ratios.

For the reserve maintenance period in effect at December 31, 2014, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $4.5 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. After receiving approval the Company repurchased 56,565 shares of outstanding common stock in 2013. During 2014 the Company repurchased 374,130 shares of outstanding common stock.

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the 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. With the repayment in full to United States Department of the Treasury in fourth quarter of 2013, this consent is no longer needed.

73

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2014, the SOP 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, 2014, the SOP II had 12,607 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, 2014:

	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Options outstanding at the beginning of the year		94,341		$	5.24	$	—
Options granted		—			—
Options exercised		—			—
Forfeitures		(81,734	)		5.24
Options outstanding at the end of the year		12,607		$	5.24	$	—
Options exercisable at the end of the year		12,607		$	5.24	$	—

Total options outstanding and exercisable at December 31, 2014 were 12,607 at an exercise price of $5.24 per share with a weighted average expected term of 3.12 years. At December 31, 2014, authorized shares of common stock reserved for future grants of options totaled 158,071 under the SOP II and 105,299 under the SPP II.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Stock Based Compensation (Continued)

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2014 and 2013 under the SOP II.

As of December 31, 2014, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.

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 2012, 2013 or 2014.

Note 17 - Employee and Director Benefit Plans

Employees’ 401(k) Retirement 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 of the 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 $330,448 in 2014, $317,281 in 2013 and $323,545 in 2012, 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.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

Employee Stock Ownership Plan

During the first quarter of 2014, the board of directors of the Company voted to terminate the ESOP effective March 1, 2014. As of February 28, 2014, the ESOP held 740,530 shares, or 9.95% of the Company’s total outstanding shares of common stock, of which 252,446 shares were unallocated to participants in the ESOP.

The Company originally made a term loan to the ESOP in 1999. In addition, the Company established a $500,000 line of credit to the ESOP in 2010 and established a second $500,000 line of credit to the ESOP in 2013. The ESOP used the proceeds of the term loan and lines of credit to purchase shares of the Company’s common stock for the benefit of qualified employees. The unallocated shares of stock held by the ESOP were pledged as collateral for the term loan and lines of credit. As debt payments were made on the term loan and lines of credit, unallocated shares associated with those debt payments were released to the ESOP and allocated among participants.

In connection with the termination of the ESOP, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company in partial satisfaction of the outstanding balance on the term loan and lines of credit. The fair value of these unallocated shares was insufficient to repay the term loan and lines of credit in full. As a result, the Company expensed the remaining balance of $8,600. Upon the transfer of the unallocated shares to the Company, these shares were cancelled and returned to the Company’s pool of authorized but unissued shares of common stock.

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter all shares under the ESOP were distributed to the participants.

The Company did have expense of approximately 2% of eligible compensation as a contribution to the ESOP Plan during the first part of 2014, the same as 2013 and 2012. Expenses of $45,693, $223,283 and $209,434 during the years ended December 31, 2014, 2013 and 2012, respectively, were incurred in connection with the ESOP.

The ESOP had a put option that allowed the employee to put their shares back to the Company. The Company has a liability set aside at fair value in the amount of approximately $561,000 for shares that can be put back to the Company during the first half of 2015. After this time, the put option will expire and there will no longer be a liability for the Company. This liability was reclassified from additional paid in capital and is presented separately on the Company’s balance sheet.

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 upon separation from service. 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 separation from service.

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

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 separation from service.

During 2014, 2013 and 2012, $316,800, $336,800 and $266,800, respectively was expensed each year for benefits provided under the plans The liability accrued for deferred compensation under the plan amounted to $3.3 million and $2.8 million at December 31, 2014 and 2013, 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 2014 and 2013, the expense associated with these policies was $112,176 and $63,732 respectively.

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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

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, 2014 and December 31, 2013, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2014 and December 31, 2013:

December 31, 2014
	Carrying		Estimated
	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	50,791	$	50,826	$	47,605	$	3,221	$	—
Securities available for sale		112,824		112,824		19,386		93,438		—
Securities held to maturity		5,496		5,450		2,053		3,397		—
Loans held for investment, net		307,115		321,295		—		—		321,295
Loans held for sale		2,147		2,147		—		2,147
Restricted stock		1,038		1,038		1,038		—		—
Bank-owned life insurance		6,645		6,645		—		—		6,645
Accrued interest receivable		1,747		1,747		—		—		1,747
FINANCIAL LIABILITIES
Deposits	$	456,435	$	442,655	$	—	$	—	$	442,655
Short-term borrowings		4,685		4,685		—		4,685		—
Long-term borrowings		24		24		—		24
Junior subordinated debt		9,534		9,703		—		—		9,703
Accrued interest payable		180		180		—		—		180

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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)

December 31, 2013

	Carrying		Estimated
	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	72,394	$	72,443	$	70,951	$	1,492	$	—
Securities available for sale		100,280		100,280		21,286		78,994		—
Loans held for investment, net		302,253		308,112		—		—		308,112
Loans held for sale		1,139		1,139		—		1,139		—
Restricted stock		1,184		1,184		1,184		—		—
Bank-owned life insurance		6,516		6,516		—		—		6,516
Accrued interest receivable		1,747		1,747		—		—		1,747
FINANCIAL LIABILITIES
Deposits	$	453,708	$	438,593	$	—	$	—	$	438,593
Short-term borrowings		5,509		5,509		—		5,509		—
Long-term borrowings		36		36		—		36		—
Junior subordinated debt		11,127		11,271		—		—		11,271
Accrued interest payable		224		224		—		—		224

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

• Cash and cash equivalents - The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1.

• Securities available for sale - Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in note 9.

• Loans - The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made and carried in level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation. Loans held for sale are recorded in Level 2.

• Restricted stock - It is not practicable to determine fair value of restricted stock which is comprised of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability and it is presented at its carrying value and is recorded in Level 1 due to the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank.

• Bank-owned life insurance - The carrying amount of bank-owned life insurance is the current cash surrender value and is recorded in level 3.

• Accrued interest receivable and payable - Both accrued interest receivable and payable are recorded in Level 3, as there are not active markets for these.

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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)

• Deposits - The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 3. 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 and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Junior subordinated debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At December 31, 2014, the subsidiary bank 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, 2014 and 2013:

	December 31, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	19,386	$	19,386	$	—	$	—
US Gov’t		50,775		—		50,775		—
Mortgage-backed securities and CMO’s		27,572		—		27,572		—
State and political subdivisions		12,080		—		12,080		—
Corporate bonds		3,011		—		3,011
Total assets at fair value	$	112,824	$	19,386	$	93,438	$	—
Total liabilities at fair value	$	—	$	—	$	—	$	—
	December 31, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	21,286	$	21,286	$	—	$	—
US Gov’t		34,300		—		34,300		—
Mortgage-backed securities and CMO’s		37,006		—		37,006		—
State and political subdivisions		7,688		—		7,688		—
Total assets at fair value	$	100,280	$	21,286	$	78,994	$	—
Total liabilities at fair value	$	—	$	—	$	—	$	—

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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)

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, 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, 2014 and December 31, 2013:

	December 31, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,854	$	—	$	—	$	1,854
Loans held for sale		2,147		—		2,147		—
Other real estate owned		3,290		—		—		3,290
Total assets at fair value	$	7,291	$	—	$	2,147	$	5,144
Total liabilities at fair value	$	—	$	—	$	—	$	—
	December 31, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	5,903	$	—	$	—	$	5,903
Loans held for sale		1,139		—		1,139		—
Other real estate owned		3,533		—		—		3,533
Total assets at fair value	$	10,575	$	—	$	1,139	$	9,436
Total liabilities at fair value	$	—	$	—	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

			General
	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:
Impaired loans	Discounted appraisals and broker price opinions	Expected loss rates	0 – 25%
OREO	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%

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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)

December 31, 2013

			General
	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:
Impaired loans	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%
OREO	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%

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.

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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,
	2014		2013
	(dollars in thousands)
Assets
Cash and demand deposits	$	297	$	1,858
Interest-earning deposits		3,674		3,998
Investments in:
Bank subsidiaries		40,931		39,176
Nonbank subsidiaries		594		618
Other assets		1,115		1,229
Total assets	$	46,611	$	46,879
Liabilities and shareholders’ equity
Master notes	$	3,674	$	3,998
Short term debt		1,000		—
Junior subordinated debentures		9,534		11,127
Other liabilities		149		71
Total liabilities		14,357		15,196
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)		561		1,716
Shareholders’ equity		31,693		29,967
Total liabilities and shareholders’ equity	$	46,611	$	46,879

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data (Continued)

Condensed Statements of Income

	2014			2013			2012
	(dollars in thousands)
Equity in undistributed earnings of subsidiaries	$	1,456		$	(1,053	)	$	1,100
Dividends received from subsidiaries		1,000			2,719			—
Interest income		11			21			41
Management and service fees		—			4,347			6,937
Other income		87			166			102
Interest expense		(583	)		(659	)		(670	)
Other operating expense		(624	)		(4,881	)		(7,428	)
Income tax benefit		332			294			322
Net income	$	1,679		$	954		$	404
Consolidated net income	$	1,679		$	954		$	404
Less: Net income attributable to noncontrolling interest		(591	)		(478	)		—
Net income attributable to Uwharrie Capital Corp		1,088			476			404
Dividends – preferred stock		—			(325	)		(645	)
Net Income (loss) available to common shareholders	$	1,088		$	151		$	(241	)
Net income (loss) per common share
Basic	$	0.15		$	0.02		$	(0.03	)
Diluted	$	0.15		$	0.02		$	(0.03	)
Weighted average shares outstanding
Basic		7,300,988			7,422,286			7,519,100
Diluted		7,300,988			7,422,286			7,519,100

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows

	2014			2013			2012
	(dollars in thousands)
Cash flows from operating activities
Net income	$	1,679		$	954		$	404
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed earnings of subsidiaries		(1,456	)		1,053			(1,100	)
(Increase) decrease in other assets		136			2,298			(734	)
Increase (decrease) in other liabilities		78			(305	)		(97	)
Net cash provided (used) by operating activities		437			4,000			(1,527	)
Cash flows from financing activities
Net decrease in master notes		(324	)		(1,453	)		(757	)
Net increase in short-term debt		1,000			—			—
Net repayment of issuance of junior subordinated debentures		(1,593	)		—			—
Repurchase of common stock, net		(1,401	)		(169	)		—
Repayment of series A preferred stock		—			(10,500	)		—
Preferred stock redeemed by from bank subsidiary		—			7,800			—
Increase in unearned ESOP compensation		—			(114	)		(103	)
Dividends on preferred stock		—			(225	)		(545	)
Cash paid for fractional shares		(4	)		—			—
Net cash used by financing activities		2,322			(4,661	)		(1,405	)
Net decrease in cash and cash equivalents		(1,885	)		(661	)		(2,932	)
Cash and cash equivalents at beginning of year		5,856			6,517			9,449
Cash and cash equivalents at end of year	$	3,971		$	5,856		$	6,517

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(dollars in thousands except ratios, per share and shares outstanding information)

	2014			2013			2012			2011			2010
Summary of Operations
Interest income	$	18,457		$	19,465		$	21,871		$	23,822		$	24,487
Interest expense		1,960			2,734			3,698			4,737			5,951
Net interest income		16,497			16,731			18,173			19,085			18,536
Provision for (recovery of) loan losses		(389	)		28			1,832			3,456			4,919
Noninterest income		7,321			7,587			10,675			8,256			9,898
Noninterest expense		21,880			22,994			26,247			22,789			22,651
Income taxes		648			342			365			196			151
Net income	$	1,679		$	954		$	404		$	900		$	713
Per Common Share
Net income – basic(1)	$	0.15		$	0.02		$	(0.03	)	$	0.03		$	0.01
Net income (loss) – diluted(1)		0.15			0.02			(0.03	)		0.03			0.01
Book value(1)		4.55			3.94			4.23			4.38			4.29
Weighted Average Shares
Outstanding:
Basic(1)		7,300,988			7,422,286			7,519,100			7,616,744			7,635,248
Diluted(1)		7,300,988			7,422,286			7,519,100			7,616,744			7,635,248
Ratios
Return on average assets		0.33	%		0.18	%		0.08	%		0.17	%		0.14	%
Return on average equity		4.03	%		2.17	%		0.90	%		2.02	%		1.57	%
Average equity to average assets		8.11	%		8.34	%		8.52	%		8.39	%		8.83	%
Selected Year-end Balances
Assets	$	518,464		$	517,320		$	545,007		$	526,902		$	535,426
Loans held for investment		310,853			307,348			329,183			366,675			387,769
Securities		118,320			100,280			91,638			88,661			96,395
Deposits		456,435			453,708			457,612			431,338			434,033
Borrowed funds		14,243			16,672			31,363			46,024			54,543
Shareholders’ equity		42,262			40,509			42,729			44,254			43,493
Selected Average Balances
Assets	$	513,676		$	527,693		$	526,361		$	529,970		$	514,425
Loans held for investment		309,338			317,274			347,762			381,419			375,381
Securities		109,056			116,333			102,686			90,701			86,780
Deposits		451,160			455,146			440,274			430,998			406,304
Borrowed funds		14,782			22,340			35,543			50,529			58,291
Shareholders’ equity		41,681			43,994			44,868			44,462			45,425

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for years 2010 through 2013 have been adjusted to reflect the 2% stock dividend in 2014.

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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 36-86 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. 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 because of market and other factors. Such forward-looking statements are subject to risks and uncertainties that 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 periodically. 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, 2014 and December 31, 2013

The Company’s total assets increased $1.2 million from $517.3 million at December 31, 2013 to $518.5 million at December 31, 2014. This increase resulted primarily from a $3.5 million increase in loans held for investment and an increase in investment securities available for sale of $12.5 million and securities held to maturity of $5.5 million. These increases were offset by a decrease in cash and cash equivalents of $21.6 million.

Cash and cash equivalents decreased $21.6 million during the year ended December 31, 2014. Cash and due from banks declined $1.1 million, while interest-earning deposits with banks decreased $20.5 million. Throughout 2014, the Company purchased $31.1 million in new securities, had growth in loans held for investment of $3.5 million and repaid $3.1 million in borrowings. All of these factors related to the decline in interest-earning deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $18.0 million or 18.0%, from $100.3 million at December 31, 2013 to $118.3 million combined at December 31, 2014. During the year, in an effort to improve our concentration risk in various sectors as well as to reduce our extension risk in a rising interest rate environment, management made the decision to sell $7.2 million of investment securities, including $6.9 million of US Treasuries and government agency bonds and $328,000 of mortgage-backed securities. There were also $4.4 million in securities called during 2014. The Company realized a net loss of $2,000 on these transactions. The Company is reinvesting the proceeds from these sales and calls and purchasing new securities that are lower duration securities as well as variable rate securities. These investments should provide better protection in a rising rate environment and mitigate the downside risk embedded in the current portfolio. At December 31, 2014, the Company had net unrealized gains on the securities available for sale of $462,000.

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Loans held for investment increased $3.5 million from $307.3 million at December 31, 2013 to $310.8 million at December 31, 2014. The growth in the portfolio was spread across several loan portfolio classes with other real estate construction experiencing the largest growth of $4.8 million or 27.2%. The real estate one to four family class, home equity class and the real estate one to four family construction all experienced appreciable growth. This growth was offset by declines in the commercial real estate loan class and both the commercial and consumer classes, with commercial real estate seeing the greatest decline of $3.4 million or 3.6%. Loans held for sale increased 88.5% or $1.0 million compared to the prior year. The allowance for loan losses was $3.7 million at December 31, 2014, which represents 1.20% of the loan portfolio, a decrease from 1.66% at December 31, 2013. Net chargeoffs decreased from $1.7 million at December 31, 2013 to $968,000 at December 31, 2014.

Other changes in our consolidated assets are related to premises and equipment, restricted stock, bank owned life insurance, other real estate owned, and other assets. Bank owned life insurance increased $129,000 while premises and equipment increased $1.1 million. The increase in premises and equipment was related to the purchase of an office that the Company was currently leasing. The building was purchased for $1.6 million; The Company did sell two pieces of property that had been purchased for future use. The two properties were sold for $376,000, with the Company realizing a gain on the sales of $138,000. During 2014, other real estate owned declined $1.3 million, from $7.2 million at December 31, 2013 to $5.9 million at December 31, 2014. Throughout 2014, the Company sold seventeen pieces of property totaling $2.3 million and resulting in a net gain on the sale of other real estate owned of $398,000. Also during 2014, the Company had additional write downs and changes in reserves of $647,000 resulting from new appraisals and evaluations. These declines were offset by the addition of thirteen pieces of property foreclosed on totaling $1.3 million. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $146,000 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 increased $39,000 in 2014, while the required ownership in Federal Home Loan Bank stock declined $185,000. Other assets decreased $1.4 million primarily from changes in deferred taxes.

Customer deposits continued to be our principal funding source in 2014. At December 31, 2014, deposits from our customers totaled $456.4 million, an increase of $2.7 million from $453.7 million at December 31, 2013. Demand noninterest bearing checking increased $5.5 million, while interest checking and money market accounts increased $14.2 million during 2014. These increases were offset by declines in savings deposits of $2.4 million, time deposits over $100,000 of $5.8 million and other time deposits of $8.8 million respectively during 2014. In the current low rate environment, customers are continuing to stay in short term deposit products and are continuing to shift away from time deposits.

During 2014 the Company’s net borrowings decreased by $2.4 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. The Company repaid $1.5 million of Federal Home Loan Bank advances that matured during 2014. At December 31, 2014, there were no advances outstanding in the total borrowings of $14.2 million. Other components of total borrowings include $9.5 million in junior subordinated debt and $4.7 million in master notes and other secured borrowings.

During the first quarter of 2014, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $9.5 million. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this

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private placement were issued and outstanding at December 31, 2014. All proceeds also qualify for and are included in the calculation of Tier 2 capital. On March 31, 2014, the Company called its entire $11.1 million private outstanding issue of fixed rate subordinated debt that had a final maturity of December 31, 2018.

Other liabilities increased from $4.5 million at December 31, 2013 to $4.8 million at December 31, 2014, an increase of $300,000

The Company has historically had an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company’s stock trades on the OTC Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be required to buy back.

As disclosed in Note 17 to the financial statements filed with in this report, the Company voted to terminate its ESOP effective March 1, 2014. In connection with this termination, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company to partially satisfy the term loan and lines of credit the ESOP had outstanding at the time. The effect this had on equity was minimal with total outstanding shares being reduced. The remaining balance of $8,600 on the loans was expensed by the Company to completely satisfy the loans.

During the fourth quarter of 2014, all allocated shares were distributed to the ESOP participants. At December 31, 2014, there was $561,000 set aside to cover the liability for shares that could be put back to the Company during the first six months of 2015. After that time, the put option will expire and this liability will no longer exist.

At December 31, 2014, total shareholders’ equity was $42.3 million, an increase of $1.8 million from December 31, 2013. Net income for the period was $1.7 million. Unrealized gains and losses on investment securities net of tax increased $867,000. With the aforementioned termination of the ESOP, the unearned ESOP compensation of $989,000 was repaid and $1.2 million of the liability set aside to cover the ESOP repurchase obligation was reallocated back to shareholders’ equity. The Company did repurchase 374,130 of outstanding common stock for $1.4 million. Of the shares repurchased, 339,269 shares were related to the ESOP termination. The Company also has $591,000 in dividends attributed to noncontrolling interest. At December 31, 2014, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Results of Operations for the Years Ended December 31, 2014 and 2013

Earnings

Uwharrie Capital Corp reported net income of $1.7 million for the twelve months ended December 31, 2014, as compared to $954,000 for the twelve months ended December 31, 2013, an increase of $725,000. Net income available to common shareholders was $1.1 million or $0.15 per common share at December 31, 2014, compared to net income available to common shareholders of $151,000 or $0.02 per common share at December 31, 2013. Net income available to common shareholders is net income less any dividends and discount

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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 that was repaid in 2013 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our subsidiary bank 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 wholesale 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 levels of noninterest bearing liabilities and capital.

Net interest income decreased $234,000 to $16.5 million for 2014 compared to the $16.7 million earned in 2013. During the year ended December 31, 2014, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $208,000. The average yield on our interest-earning assets decreased 8 basis points to 4.01%, while the average rate we paid for our interest-bearing liabilities decreased 16 basis points. These decreases resulted in an increase of 10 basis points in our interest rate spread, from 3.41% in 2013 to 3.51% in 2014. Our net interest margin for 2014 was 3.60%, compared to 3.52% in 2013. 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 good 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 102 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 103 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 a recovery of ($389,000) and provisions of $28,000 for the twelve months ended December 31, 2014 and 2013, respectively. There were net loan charge-offs of $968,000 for the twelve months ended December 31, 2014 as compared with net loan charge-offs of $1.7 million during the same period of 2013. Refer to the Asset Quality discussion beginning on page 94 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 3.5%, from $7.6 million in 2013, to $7.3 million in 2014, a decrease of $266,000. While the Company did benefit from another good year of income from mortgage loan sales, income from mortgage loan sales decreased $1.1 million to $1.0 million for 2014 compared to $2.1 million during 2013. Service charges on deposit accounts produced earnings of $1.5 million, a decrease of 9.8%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 15.7% increase during 2014. This is related to an increase of $290,000 in fees from assets under management. The Company had realized losses on the

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sale of investments in the amount of $2,000 for the twelve months ending December 31, 2014, as compared to realized losses of $523,000 for the same period in 2013. The Company also had realized gains on the sale of other real estate owned of $398,000 compared to realized gains of $290,000 for the twelve months ended December 31, 2014 and 2013, respectively.

Noninterest Expense

Noninterest expense for the year ended December 31, 2014 was $21.9 million compared to $23.0 million for the same period of 2013, a decrease of $1.1 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $372,000, from $12.4 million for the period ending December 31, 2013 to $12.1 million for the same period in 2014. This decrease is attributable to a reduction in staff related to the consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $45,000. Professional fees and services increased $167,000 for the twelve month period. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $34,000 from the prior year, while premiums paid for FDIC insurance decreased $93,000 for the same period. Data processing costs declined $55,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $401,000, from $1.6 million in 2013 to $1.2 million during 2014. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $647,000 compared to $921,000 for the same period in 2013. Other noninterest expense experienced a decrease totaling $198,000 for the comparable twelve month period. The table on page 106 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax expense of $648,000 for 2014 at an effective tax rate of 27.85% compared to income tax expense of $342,000 in 2013 with an effective tax rate of 26.39%.

Results of Operations for the Years Ended December 31, 2013 and 2012

Earnings

Uwharrie Capital Corp reported net income of $954,000 for the twelve months ended December 31, 2013, as compared to $404,000 for the twelve months ended December 31, 2012, an increase of $550,000. Net income available to common shareholders was $151,000 or $0.02 per common share at December 31, 2013, compared to net loss available to common shareholders of $(241,000) or $(0.03) per common share at December 31, 2012. 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 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our subsidiary bank is net interest income. Net interest income is the difference between interest income, principally

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And Results of Operations

from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale 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 levels of noninterest bearing liabilities and capital.

Net interest income decreased $1.5 million to $16.7 million for 2013 compared to the $18.2 million earned in 2012. During the year ended December 31, 2013, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $928,000. The average yield on our interest-earning assets decreased 58 basis points to 4.09%, while the average rate we paid for our interest-bearing liabilities decreased 24 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 35 basis points in our interest rate spread, from 3.76% in 2012 to 3.41% in 2013. Our net interest margin for 2013 was 3.52%, compared to 3.90% in 2012. 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 good 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 102 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 103 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 $28,000 and $1.8 million for the twelve months ended December 31, 2013 and 2012, respectively. There were net loan charge-offs of $1.7 million for the twelve months ended December 31, 2013 as compared with net loan charge-offs of $1.8 million during the same period of 2012. Refer to the Asset Quality discussion beginning on page 94 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 28.9%, from $10.7 million in 2012, to $7.6 million in 2013, a decrease of $3.1 million. While the Company did benefit from another strong year of income from mortgage loan sales, income from mortgage loan sales decreased $1.6 million to $2.1 million for 2013 compared to $3.7 million during 2012. Service charges on deposit accounts produced earnings of $1.6 million, a decrease of 5.9%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 6.9% increase during 2013. This is related to an increase of $90,000 in fees from assets under management. The Company also realized losses on the sale of investments in the amount of $523,000 for the twelve months ending December 31, 2013, as compared to realized gains of $1.3 million for the same period in 2012, a $1.8 million reduction in net income.

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And Results of Operations

Noninterest Expense

Noninterest expense for the year ended December 31, 2013 was $23.0 million compared to $26.2 million for the same period of 2012, a decrease of $3.2 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $468,000, from $12.9 million for the period ending December 31, 2012 to $12.4 million for the same period in 2013. This decrease is attributable to a reduction in staff related to aforementioned consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $56,000. Professional fees and services increased $92,000 for the twelve month period. This increase in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000 that reduced professional fees and services during 2012. Of that amount, $270,000 was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy and $90,000 associated with a previously closed government guaranteed loan. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $37,000 from the prior year, while premiums paid for FDIC insurance also decreased $175,000 for the same period. Data processing costs declined $105,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $1.4 million, from $3.0 million in 2012 to $1.6 million during 2013. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $1.0 million compared to $2.4 million for the same period in 2012. During 2012, the Company had a goodwill impairment charge that resulted in an expense of $989,000. Other noninterest expense experienced a decrease totaling $281,000 for the comparable twelve month period. The table on page 106 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax expense of $342,000 for 2013 at an effective tax rate of 26.39% compared to income tax expense of $365,000 in 2012 with an effective tax rate of 47.46%. The higher effective rate for 2012 is related to the tax effect of the goodwill impairment.

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 decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. 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, periodically 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 loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of

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And Results of Operations

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 designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan 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. Because of this process, certain loans are deemed as impaired and evaluated as an impaired loan.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent 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 because 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.

At December 31, 2014 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $7.6 million compared to $17.6 million at December 31, 2013, a net decrease of $10.0 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $4.7 million at December 31, 2013 to $2.2 million at December 31, 2014. During the second quarter of 2014, the Company performed a comprehensive review of all impaired loans. This review resulted in $6.9 million in loans with previously identified specific reserves of $419,000 being removed from impaired status. These loans were initially considered impaired during a period of heightened uncertainty in which each loan was experiencing significant delinquency stemming from reductions in cash flow attributed to the slow economy. Management reevaluated each of these loans and determined they have now performed under the original terms of the loan and remained in current or non-delinquent status for a sufficient amount of time to remove the loans from the impaired loan category. Therefore, management determined the previously identified credit weaknesses have been remediated and, while most of these loans currently retain their substandard risk grade status, they were all removed from the impaired loan status as management expects to collect the current balance due in accordance with the original terms of the loan. Also, the transfer of loans totaling $972,000 from impaired loans to other real estate owned, the Bank’s receipt $2.0 million in loan principal payments, and charge-offs of principal that had previously established specific reserves of $1.0 million, were additional factors contributing to the decrease in impaired loans. These decreases were offset by the addition of ten relationships, in the amount of $1.8 million, that were added to impaired loans during 2014.

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Along with changes to the balance of impaired loans, the Company reevaluated its impairment measurement techniques to determine whether the most relevant method was being utilized for each impaired loan. The remaining impaired loans primarily consist of performing TDRs. This resulted in all the remaining impaired loans moving from the collateral method to the cash flow method with the exception of three relationships deemed to be collateral dependent. The switch from evaluating impaired loans under the collateral method to the cash flow method resulted in the reversal of $334,000 in previously established specific reserves. Due to the nature of the modifications the Company enters into with Borrowers, while payments may be reduced and time extended significant interest rate concessions were not entered into and loan to life cash flows are not significantly altered. Given this and the uncertainty at the time these modifications occurred and the reserves were established, management didn’t believe the cash flow method provided adequate levels of reserves. This reversal, along with the removal of specific reserves associated with loan upgrades discussed above in the amount of $419,000, payoffs on loans with specific reserves of $363,000 and updated appraisals on one of the collateral dependent relationships, lowering the impairment by $349,000, resulted in $1.9 million being removed from specific reserves during 2014.

The allowance expressed as a percentage of gross loans held for investment decreased 46 basis points from 1.66% at December 31, 2013 to 1.20% at December 31, 2014. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.93% at December 31, 2013 and 1.08% at December 31, 2014, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 13.60% to 6.04% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. For the first time in several updates, beacon scores experienced significant improvement during 2013. This trend continued during the first nine months of 2014 with beacon scores continuing to show improvement. The average beacon score increased fifteen points from 702 to 717 during 2014.

During the second quarter of 2014, the allocation for general reserves increased $1.1 million from the previous quarter. Two changes were made to the model’s inputs that resulted in this increase. First, the process of assigning the probability of default to commercial loans was changed to be based on internally determined loan grades instead of the credit scores of the underlying individual borrower This change added approximately $260,000 to general reserves. Second, it was decided that a more accurate and stable measure of the risk in the portfolio would be achieved by a “through the cycle” probability of default. The probabilities of default are sampled from the prior two years making the previous method of estimating default a severely lagging statistic. Credit quality is currently improving and has been for the last several years; but there is no guarantee that a large negative economic shock won’t occur, increasing the credit risk in the portfolio. Using an average probability of default that is derived from both adverse and favorable economic conditions more accurately represents the range of possible risks to the loan portfolio. We used all available historical defaults to compute this average, dating back to the 2009-2011 default windows. This change added nearly $1.0 million to general reserves.

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Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 1.53% at December 31, 2013, to 0.72% at December 31, 2014.

Other real estate owned decreased $1.3 million during 2014. The Company sold seventeen pieces of foreclosed property totaling $2.3 million realizing net gains of $398,000. The Company also had write downs and changes in reserves totaling $647,000 on the remaining existing property. These decreases in other real estate owned were offset by thirteen new pieces of property being foreclosed on totaling $1.3 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 both December 31, 2014 and December 31, 2013 totaled $6.4 million.

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

Nonperforming Assets

(dollars in thousands)

	At December 31,
	2014			2013			2012			2011			2010
Nonperforming Assets:
Nonaccrual loans past due 90 days or more	$	—		$	—		$	—		$	—		$	407
Nonaccrual loans		2,246			4,717			9,480			7,862			19,730
Other real estate owned		5,865			7,170			8,713			10,258			2,022
Total nonperforming assets	$	8,111		$	11,887		$	18,193		$	18,120		$	22,159
Allowance for loan losses	$	3,738		$	5,095		$	6,801		$	6,815		$	9,067
Nonperforming loans to total loans		0.72	%		1.53	%		2.88	%		2.14	%		5.19	%
Allowance for loan losses to total loans		1.20	%		1.66	%		2.07	%		1.86	%		2.34	%
Nonperforming assets to total assets		1.56	%		2.30	%		3.34	%		3.44	%		4.14	%
Allowance for loan losses to nonperforming loans		166.48	%		108.02	%		71.74	%		86.88	%		45.03	%

Capital Resources

The Company continues to maintain 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 1 (consisting of shareholders’ equity less ineligible intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier 2 (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 1 leverage ratio that measures Tier 1 capital to average assets less ineligible intangible assets.

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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 1 leverage ratio of 4%. Banks, which meet or exceed a Tier 1 ratio of 6%, a total capital ratio of 10% and a Tier 1 leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2014, the Company’s subsidiary bank was well capitalized.

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $2.8 million less issuance costs of $23,000. Also during 2013, the Company redeemed at par $10.0 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and $500,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series B.

The Company expects to continue to exceed required minimum capital ratios 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 declared a 2% stock dividend in 2014. 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 were no dividends paid in 2013 or 2012.

Liquidity

Liquidity, the ability to raise cash when needed without adversely affecting 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 3 on page 104, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2014 included $15.8 million in federal funds lines of credit from correspondent banks and approximately $55.5 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 $20.3 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, 2014, borrowings from federal funds lines and the issuance of commercial paper amounted to $3.7 million. The Company also had a short-term line of credit totaling $1.0 million. Long-term debt at that date consisted of junior subordinated debt of $9.5 million and a mortgage payable of $25,000.

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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, 2014.

	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	$	4,685	$	4,685	$	—	$	—	$	—
Long-term debt		9,558		—		24		9,534		—
Total contractual cash obligations, excluding deposits		14,243		4,685		24		9,534		—
Deposits		456,435		416,039		38,423		1,831		142
Total contractual cash obligations, including deposits	$	470,678	$	420,724	$	38,447	$	11,365	$	142

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 experiences. 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 are the key factors. 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.

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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.

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, management periodically performs valuations 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 revenue for the Company. Net Interest Margin is the difference between the yield on earning assets and interest paid on costing 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 periods. 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 along with multiple other forecasted assumptions. Management believes this provides a more relevant

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Management’s Discussion And Analysis of Financial Condition

And Results of Operations

view of interest rate risk sensitivity than the traditional gap analysis because the gap analysis ignores optionality embedded in the balance sheet. 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 rate environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary bank, 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 (6.79%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 18.27% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, the subsidiary bank is 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. The subsidiary bank has 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 interest-sensitive liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result from changes in market interest rates. To that end, management has recommended and the board has approved policy limits that minimize the downside risk from interest rate shifts. The aforementioned ratios are within those stated limits of -18% for the respective modeled scenarios at the subsidiary bank and combined. Managing interest rate risk is an important factor to the long-term viability of the Company since 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, asset growth projections, and necessary operating liquidity.

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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)

	2014							2013							2012
	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	$	98,549		1,632		1.66	%	$	108,767		1,464		1.35	%	$	93,170		1,686		1.81	%
Non-taxable securities (1)		10,507		321		4.92	%		7,566		251		5.40	%		9,516		324		5.54	%
Short-term investments		52,554		168		0.32	%		51,612		177		0.34	%		26,735		137		0.51	%
Taxable loans (2)		295,004		15,903		5.39	%		303,698		17,134		5.64	%		336,189		19,286		5.74	%
Non-taxable loans (1)		14,974		433		4.66	%		15,451		439		4.62	%		13,021		438		5.47	%
Total interest-earning assets		471,588		18,457		4.01	%		487,094		19,465		4.09	%		478,631		21,871		4.67	%
Non-earning assets
Cash and due from banks		5,898							2,172							6,704
Premises and equipment, net		14,806							14,127							15,024
Interest receivable and other		21,384							24,300							26,002
Total non-earning assets		42,088							40,599							47,730
Total assets	$	513,676						$	527,693						$	526,361
Interest-bearing liabilities
Savings deposits	$	38,751	$	57		0.15	%	$	45,706	$	171		0.37	%	$	41,822	$	197		0.47	%
Interest checking & MMDA		230,779		299		0.13	%		220,663		439		0.20	%		192,123		542		0.28	%
Time deposits		101,925		997		0.98	%		119,149		1,300		1.09	%		138,871		1,810		1.30	%
Total deposits		371,455		1,353		0.36	%		385,518		1,910		0.50	%		372,816		2,549		0.68	%
Short-term borrowed funds		4,830		34		0.70	%		10,657		160		1.50	%		18,591		353		1.90	%
Long-term debt		9,952		573		5.76	%		11,683		664		5.68	%		16,952		796		4.70	%
Total interest-bearing liabilities		386,237		1,960		0.51	%		407,858		2,734		0.67	%		408,359		3,698		0.91	%
Noninterest liabilities
Transaction deposits		79,705							69,628							67,458
Interest payable and other		6,053							6,213							4,331
Total liabilities		471,995							483,699							480,148
Shareholders’ equity		41,681							43,994							46,213
Total liabilities and shareholders equity	$	513,676						$	527,693						$	526,361
Interest rate spread						3.51	%						3.41	%						3.76	%
Net interest income and net interest margin			$	16,497		3.60	%			$	16,731		3.52	%			$	18,173		3.90	%

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 34.00% tax rate.

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

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Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)

	2014 Versus 2013									2013 Versus 2012
							Net									Net
	Volume			Rate			Change			Volume			Rate			Change
Interest-earning assets
Taxable securities	$	(153	)	$	321		$	168		$	246		$	(468	)	$	(222	)
Non-taxable securities		94			(24	)		70			(66	)		(7	)		(73	)
Short-term investments		3			(12	)		(9	)		106			(66	)		40
Taxable loans		(480	)		(751	)		(1,231	)		(1,848	)		(304	)		(2,152	)
Non-taxable loans		(14	)		8			(6	)		75			(74	)		1
Total interest-earning assets		(550	)		(458	)		(1,008	)		(1,487	)		(919	)		(2,406	)
Interest-bearing liabilities
Savings deposits		(18	)		(96	)		(114	)		16			(42	)		(26	)
Transaction and MMDA deposits		17			(157	)		(140	)		69			(172	)		(103	)
Other time deposits		(178	)		(125	)		(303	)		(236	)		(274	)		(510	)
Short-term borrowed funds		(64	)		(62	)		(126	)		(135	)		(58	)		(193	)
Long-term debt		(99	)		8			(91	)		(273	)		141			(132	)
Total interest-bearing liabilities		(342	)		(432	)		(774	)		(559	)		(405	)		(964	)
Net interest income	$	(208	)	$	(26	)	$	(234	)	$	(928	)	$	(514	)	$	(1,442	)

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

Investment Securities Portfolio Analysis

(dollars in thousands)

	December 31, 2014
	Amortized		Estimated		Book
	Cost		Fair Value		Yield(1)
Securities available for sale
U. S. Treasury
Due after one but within five years		19,030		19,386		1.86	%
		19,030		19,386		1.86	%
U.S. Government agencies
Due within one year		4,972		4,998		2.77	%
Due after one but within five years		36,292		36,116		1.30	%
Due after ten years		9,705		9,661		0.96	%
		50,969		50,775		1.38	%
Mortgage-backed securities
Due after one but within five years		4,192		4,151		1.52	%
Due after five but within ten year		3,003		3,046		2.43	%
Due after ten years		20,553		20,375		2.00	%
		27,748		27,572		1.98	%
State and political
Due within one year		175		177		4.62	%
Due after one but within five years		2,389		2,541		4.96	%
Due after five but within ten year		3,296		3,481		4.89	%
Due after ten years		5,715		5,881		4.36	%
		11,575		12,080		4.64	%
Corporate Bonds
Due after five but within ten years		3,040		3,011		1.24	%
		3,040		3,011		1.24	%
Total Securities available for sale
Due within one year		5,147		5,175		2.83	%
Due after one but within five years		61,903		62,194		1.63	%
Due after five but within ten year		19,044		19,199		3.72	%
Due after ten years		26,268		26,256		2.03	%
	$	112,362	$	112,824		1.94	%

1) Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

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And Results of Operations

Financial Table 3

Investment Securities Portfolio Analysis (Continued)

(dollars in thousands)

	December 31, 2014
	Amortized		Estimated		Book
	Cost		Fair Value		Yield(1)
Securities held to maturity
U.S. Government agencies
Due after five but within ten years		2,085		2,053		2.29	%
		2,085		2,053		2.29	%
Corporate Bonds
Due after five but within ten years		3,411		3,397		2.76	%
		3,411		3,397		2.76	%
Total Securities held to maturity
Due after five but within ten years		5,496		5,450		2.58	%
	$	5,496	$	5,450		2.58	%

1) Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 4

Noninterest Income

(dollars in thousands)

	Year Ended December 31,
	2014			2013			2012
Service charges on deposit accounts	$	1,467		$	1,627		$	1,723
Other banking fees		1,917			1,589			1,455
Asset management fees		1,732			1,624			1,533
Brokerage commissions		279			186			190
Other noninterest income		388			448			552
Income from mortgage loan sales		1,001			2,113			3,740
Security gains (losses)		(2	)		(523	)		1,286
Gains (losses) from sale of OREO		398			290			(55	)
Other gains (losses) from sale of assets		141			233			251
Total noninterest income	$	7,321		$	7,587		$	10,675

Financial Table 5

Other Noninterest Expense

(dollars in thousands)

	Year Ended December 31,
	2014		2013		2012
Postage	$	184	$	171	$	211
Telephone and data lines		145		162		180
Loan collection cost		139		352		232
Shareholder relations expense		234		164		175
Dues and subscriptions		127		139		166
Other		1,457		1,496		1,801
Total other noninterest expense	$	2,286	$	2,484	$	2,765

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 6

Loan Portfolio Composition

(dollars in thousands)

	At December 31,
	2014						2013						2012
				% of Total						% of Total						% of Total
	Amount			Loans			Amount			Loans			Amount			Loans
Loan type:
Commercial	$	47,418			15.25	%	$	47,436			15.44	%	$	41,390			12.58	%
Real estate - construction		26,250			8.44	%		21,001			6.83	%		28,132			8.55	%
Real estate - residential		135,734			43.67	%		132,694			43.18	%		142,444			43.28	%
Real estate - commercial		92,517			29.76	%		95,922			31.22	%		103,304			31.39	%
Consumer		8,460			2.72	%		9,623			3.13	%		12,986			3.95	%
Other		481			0.16	%		612			0.20	%		822			0.25	%
Total loans		310,860			100.00	%		307,288			100.00	%		329,078			100.00	%
Less:
Allowance for loan losses		(3,738	)					(5,095	)					(6,801	)
Unearned net loan fees		(7	)					60						105
Net loans	$	307,115					$	302,253					$	322,382

	At December 31,
	2011						2010
				% of Total						% of Total
	Amount			Loans			Amount			Loans
Loan type:
Commercial	$	45,907			12.52	%	$	51,679			14.63	%
Real estate - construction		37,144			10.13	%		56,602			12.72	%
Real estate - residential		153,260			41.82	%		155,814			40.77	%
Real estate - commercial		114,944			31.36	%		105,123			27.13	%
Consumer		14,710			4.01	%		17,721			4.70	%
Other		602			0.16	%		739			0.05	%
Total loans		366,567			100.00	%		387,678			100.00	%
Less:
Allowance for loan losses		(6,815	)					(9,067	)
Unearned net loan fees		108						91
Net loans	$	359,860					$	378,702

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 7

Selected Loan Maturities

(dollars in thousands)

	December 31, 2014
	One Year		One to		Over Five
	or Less		Five Years		Years		Total
Commercial and agricultural	$	12,369	$	20,038	$	15,011	$	47,418
Real estate – construction		6,321		19,929		—		26,250
Total selected loans	$	18,690	$	39,967	$	15,011	$	73,668
Fixed rate loans	$	16,785	$	78,229	$	70,298	$	165,312
Sensitivity to rate changes:
Variable interest rates	$	26,403	$	43,487	$	75,651	$	145,541

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 8

Activity in the Allowance for Loan Loss

(dollars in thousands)

	At or for the Year Ended December 31,
	2014			2013			2012			2011			2010
Allowance for loan losses at beginning of year	$	5,095		$	6,801		$	6,815		$	9,067		$	5,276
Provision for (recovery of) loan losses		(389	)		28			1,832			3,456			4,919
Other		—			(5	)		—			(5	)		17
Loan charge-offs:
Commercial		8			571			322			336			59
Real estate		1,140			1,225			1,427			5,110			924
Consumer		83			175			242			390			206
Total charge-offs		1,231			1,971			1,991			5,836			1,189
Recoveries of loans previously charged off:
Commercial		81			14			43			4			3
Real estate		138			180			66			28			4
Consumer		44			48			36			101			37
Total recoveries		263			242			145			133			44
Net charge-offs		968			1,729			1,846			5,703			1,145
Allowance for loan losses at end of year	$	3,738		$	5,095		$	6,801		$	6,815		$	9,067
Net (charge-offs) recoveries as a percent of average loans		0.31	%		0.55	%		0.53	%		1.50	%		0.31	%

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And Results of Operations

Financial Table 9

Allocation of the Allowance for Loan Losses

(dollars in thousands)

	At December 31,
	2014					2013					2012
			% of Total					% of Total					% of Total
	Amount		Loans (1)			Amount		Loans (1)			Amount		Loans (1)
Commercial	$	790		21.13	%	$	722		14.17	%	$	1,180		17.35	%
Real estate - construction		223		5.97	%		1,203		23.61	%		719		10.57	%
Real estate - residential		1,775		47.50	%		2,025		39.75	%		3,020		44.41	%
Real estate - commercial		738		19.74	%		890		17.47	%		1,040		15.29	%
Consumer loans		212		5.66	%		255		5.00	%		842		12.38	%
Other		—		0.00	%		—		—	%		—		—	%
Unallocated		—		0.00	%		—		—	%		—		—	%
Total loans	$	3,738		100.00	%	$	5,095		100.00	%	$	6,801		100.00	%

	At December 31,
	2011					2010
			% of Total					% of Total
	Amount		Loans (1)			Amount		Loans (1)
Commercial	$	1,127		12.52	%	$	966		13.33	%
Real estate – construction		557		10.13	%		2,190		14.60	%
Real estate – residential		2,924		41.81	%		2,629		40.19	%
Real estate – commercial		1,459		31.37	%		2,240		27.12	%
Consumer		667		4.01	%		984		4.57	%
Other		81		0.16	%		58		0.19	%
Unallocated		—		—	%		—		—	%
Total loans	$	6,815		100.00	%	$	9,067		100.00	%

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

109

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 10

Maturities of Time Deposits

(dollars in thousands)

			Over 3		Over 6
	3 Months		Months to		Months to		Over
	or Less		6 Months		12 Months		12 Months		Total
Time Deposits of $ 100,000 or more	$	4,180	$	4,185	$	11,738	$	18,809	$	38,912
Other Time Deposits		9,402		7,517		16,741		21,587		55,247
	$	13,582	$	11,702	$	28,479	$	40,396	$	94,159

Financial Table 11

Performance Ratios

	At December 31,
	2014			2013			2012			2011			2010
Return on average assets		0.33	%		0.18	%		0.08	%		0.17	%		0.14	%
Return on average equity		4.03	%		2.17	%		0.90	%		2.02	%		1.57	%
Equity to average assets ratio		8.11	%		8.34	%		8.52	%		8.39	%		8.83	%

110

UWHARRIE CAPITAL CORP

Board of Directors

W. Stephen Aldridge, III	Charles F. Geschickter, III	Barry S. Moose
President/Funeral Director	President and	Vice President
Stanly Funeral Home, Inc.	Chief Executive Officer	Operations and Maintenance
	JTG Racing, Inc.;	Director
	ST Motorsports, Inc.	SEPI Engineering & Construction Co.
Nadine B. Bowers	Thomas M. Hearne, Jr.	Cynthia L. Mynatt
Retired - Strategic Investment	Retired – North Carolina	President
Advisors, Inc. and Bank of Stanly	Department of Transportation	Ben Mynatt Buick - GMC
Joe S. Brooks	Charles D. Horne	James E. Nance
Board Vice Chairman	President	Founder and Managing Member
Owner and Manager	Hornwood, Inc.	North State Negotiations, LLC &
Brothers Precision Tool Co.		North State Acquisitions, LLC
Ronald T. Burleson	W. Kenneth Huntley	S. Todd Swaringen
Partner	President and Owner	Partner
Thurman Burleson and Sons Farm	Huntley Oil & Gas Co., Inc.	Beane Swaringen & Company, PLLC
Bill C. Burnside, DDS	Lee Roy Lookabill, Jr.	Edward B. Tyson
Retired – General Dentist	President	Retired - Superintendent of
	Anson Real Estate and Insurance Co., Inc.	Kannapolis City Schools
Raymond R. Cranford, Jr.	W. Chester Lowder	Dusty W. West
Vice President	Board Chairman	President
Crook Motor Co., Inc.	Director of Livestock Program	Dean’s Ready Mixed, Inc.
	Public Policy Division
	NC Farm Bureau Federation, Inc.
Executive Officers
Roger L. Dick	R. David Beaver, III	Jeffrey M. Talley
President and	Chief Financial Officer	President
Chief Executive Officer	Uwharrie Capital Corp	Strategic Investment
Uwharrie Capital Corp;	and Uwharrie Bank	Advisors, Inc.;
Chief Executive Officer Uwharrie Bank		Executive Vice President Uwharrie Bank
Brendan P. Duffey	Christy D. Stoner
Chief Operating Officer and	Chief Executive Officer
Chief Risk Officer	Strategic Investment
Uwharrie Capital Corp;	Advisors, Inc.;
President Uwharrie Bank	Executive Vice President Uwharrie Bank

111