UWHARRIE CAPITAL CORP - Quarter Report: 2007 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2007

OR

For the transition period from              to             .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

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

N/A

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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 7,279,202 shares of common stock outstanding as of July 31, 2007.

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to current period classifications. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2006 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

Note 2 - Comprehensive Income

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

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Note 3 - Per Share Data

On September 19, 2006, the Company’s Board of Directors declared a 3% stock dividend payable on November 14, 2006 to shareholders of record on October 20, 2006. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company.

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

Note 4 - Loans

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Note 5 - Commitments and Contingencies

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

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At June 30, 2007, outstanding financial instruments whose contract amounts represent credit risk were approximately (numbers in thousands):

Note 6 - Recent Accounting Pronouncements

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

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

Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve

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financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complete hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company has chosen not to adopt the provision of SFAS 159 on an early basis. The Company has evaluated this statement and does not believe it will have a material effect on the Company’s consolidated financial statements.

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations.

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.

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

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Comparison of Financial Condition at June 30, 2007 and December 31, 2006.

During the six months ended June 30, 2007, the Company’s total assets increased $10.8 million or 2.8% from $383.3 million to $394.1 million. During the six months, loans held for investment increased $16.5 million or 5.7%, from $288.1 million at December 31, 2006 to $304.6 million at June 30, 2007. Investment securities increased $4.1 million during the period. These increases, however, were offset by a decrease in cash and cash equivalents of $12.0 million.

Cash and cash equivalents decreased $12.0 million during the six months ended June 30, 2007. Cash and due from banks declined $3.5 million, while federal funds sold decreased $8.5 million. The growth in the loan portfolio was partially funded by the decrease in federal funds sold.

Investment securities increased $4.1 million or 11.0% for the six month period. The Company did a $4.0 million swap selling $4.0 million in securities realizing a loss of $75 thousand and reinvested the proceeds to improve its yield. The Company also had an additional sale realizing a loss of $1 thousand and purchased $7.4 million in new investments.

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As stated, loans held for investment increased $16.5 million to $304.6 million during the period ended June 30, 2007. The Company has experienced positive growth trends in all areas of its loan portfolio. Real estate construction loans lead the way with a $8.2 million increase during the period. Loans held for sale increased 43.8% or $1.7 million during the period. The allowance for loan losses was $3.3 million at June 30, 2007 which represents 1.08% of the loan portfolio.

Other changes in our consolidated assets related to premises and equipment, interest receivable, bank owned life insurance and other assets. Premises and equipment decreased $89 thousand, interest receivable grew $61 thousand, impacted by both loan and investment growth, bank owned life insurance increased $86 thousand and other assets increased $761 thousand.

Customer deposits, our primary funding source, experienced a $3.6 million decline during the six months ended June 30, 2007, decreasing from $309.6 million to $306.0 million. Interest checking and money market accounts decreased $2.4 million, savings deposits declined $765 thousand and total time deposits decreased $935 thousand. These decreases were partially offset by an increase in demand deposits of $568 thousand.

The decline in deposits coupled with the growth in total assets resulted in an increase in net borrowings of $13.4 million during the first six months of 2007. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At June 30, 2007, $27.9 million of the total borrowings of $55.7 million were comprised of Federal Home Loan Bank advances.

At June 30, 2007, total shareholders’ equity was $30.4 million, an increase of $796 thousand from December 31, 2006. Net income for the period was $1.4 million and the Company received $36 thousand from the exercise of stock options. These increases were offset by the repurchase of 95,252 shares of the Company’s common stock at a cost of $566 thousand and unrealized losses on investment securities, net of tax, of $119 thousand.

At June 30, 2007, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended June 30, 2007 and 2006.

Net Income

Uwharrie Capital Corp reported net income of $717 thousand, or $0.10 per basic share, for the three months ended June 30, 2007, as compared to $441 thousand, or $0.06, for the three months ended June 30, 2006, an increase of $276 thousand, or $0.04 per share.

Net Interest Income

The Company’s primary source of income, net interest income, increased $269 thousand or 7.9% for the period ending June 30, 2007, as compared to the same period for 2006. Refer to the six month discussion on page 13 for further information.

Provision for Loan Losses

The provision for loan losses was ($138) thousand and $98 thousand for the three months ended June 30, 2007 and 2006 respectively. There were net loan recoveries of $440 thousand for the three months ended June 30, 2007 as compared with net loan charge-offs of $61

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thousand during the same period of 2006. Refer to the Asset Quality discussion on page 15 for further information.

Noninterest Income

Total noninterest income increased $215 thousand, from $1.3 million for the quarter ended June 30, 2006 to $1.5 million for the same period in 2007. Service charges on deposit accounts produced revenues of $556 thousand for the three months ended June 30, 2007, an increase of $57 thousand, or 11.4%. Other service fees and commissions experienced a 17.6% increase for the comparable three month periods. Growth in ATM fees of $23 thousand and investment fees on managed accounts of $144 thousand enhanced this increase. Income from mortgage loan sales increased $85 thousand from $103 thousand for the quarter ended June 30, 2006 to $188 thousand for the same period in 2007.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2007 was $4.3 million compared to $4.0 million for the same period of 2006, an increase of $271 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $209 thousand, from $2.3 million for the quarter ending June 30, 2006 to $2.5 million for the same period in 2007. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases contributed to this increase. Other noninterest expense increased $61 thousand from the comparable three month period. The table below reflects the composition of other noninterest expenses.

Other noninterest expenses

Income Tax Expense

The Company had income tax expense of $318 thousand for the three months ended June 30, 2007 resulting in an effective tax rate of 30.7% compared to income tax expense of $145 thousand and an effective rate of 24.7% in the 2006 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in the effective tax rate resulted primarily from the decrease in the level of such tax free income as a percentage of net income in the current year quarter compared to the 2006 quarter.

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Comparison of Results of Operations For the Six Months Ended June 30, 2007 and 2006.

Net Income

Uwharrie Capital Corp reported net income of $1.4 million, or $0.19 per basic share, for the six months ended June 30, 2007, as compared to $867 thousand, or $0.12, for the six months ended June 30, 2006, an increase of $508 thousand, or $0.07 per share.

Net Interest Income

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

Net interest income for the six months ended June 30, 2007 was $7.2 million as compared with $6.7 million during the quarter ending June 30, 2006, resulting in an increase of $447 thousand, or 6.7%. During the quarter ending June 30, 2007 our growth in the volume of interest-earning assets outpaced the six months growth in interest-bearing liabilities by $447 thousand. The average yield on our interest-earning assets increased 30 basis points to 7.44%, while the average rate we paid for our interest-bearing liabilities increased 48 basis points. These increases resulted in a decrease of 17 basis points in our interest rate spread, from 3.71% in 2006 to 3.54% in 2007. Our net interest margin was 4.10% and 4.25% for the comparable periods in 2007 and 2006.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2007 and 2006:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

(in thousands)

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Provision for Loan Losses

The provision for loan losses was ($138) thousand and $244 thousand for the six months ended June 30, 2007 and 2006 respectively. There were net loan recoveries of $304 thousand for the six months ended June 30, 2007 as compared with net loan charge-offs of $125 thousand during the same period of 2006. Refer to the Asset Quality discussion on page 15 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income increased $496 thousand, from $2.5 million for the six months ended June 30, 2006 to $3.0 million for the same period in 2007. Service charges on deposit accounts produced earnings of $1.1 million for the six months ended June 30, 2007, an increase of $90 thousand, or 9.3%. Other service fees and commissions experienced a 25.2% increase for the comparable six month periods. Growth in Mastercard fee income of $11 thousand and investment fees on managed accounts of $269 thousand enhanced this increase. Income from mortgage loan sales increased $155 thousand from $288 thousand for the six months ended June 30, 2006 to $443 thousand for the same period in 2007.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2007 was $8.4 million compared to $7.9 million for the same period of 2006, an increase of $498 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $406 thousand, from $4.5 million for the six months ending June 30, 2006 to $4.9 million for the same period in 2007. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases contributed to this increase. Net occupancy expense increased $56 thousand while other noninterest expense increased $82 thousand from the comparable six month period. The table below reflects the composition of other noninterest expenses.

Other noninterest expenses

Income Tax Expense

The Company had income tax expense of $603 thousand for the six months ended June 30, 2007 resulting in an effective tax rate of 30.5% compared to income tax expense of $284

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thousand and an effective rate of 24.7% in the 2006 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in the effective tax rate resulted primarily from the decrease in the level of such tax free income as a percentage of net income in the first six months compared to the same period in 2006.

Asset Quality

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

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

The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events

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affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

The provision for loan losses declined from $244 thousand for the six months ended June 30, 2006 to ($138) thousand for the current year. Additionally, the allowance expressed as a percentage of loans held for investment was 1.10% at both December 31, 2006 and June 30, 2007. The decline in the level of our provision in the 2007 period resulted primarily from improved trends in our overall asset quality. During the first six months of 2007 the levels of our impaired loans and the specific impairment identified for those impaired loans decreased by $1.2 million and $121 thousand, respectively, due primarily to the pay off of one impaired loan that also resulted in a recovery of $173 thousand. Additionally, other potential problem loans, which consist of loans which are currently performing and are not deemed to be impaired, but about which we have serious doubts as to the borrower’s ability to comply with present repayment terms, declined from $2.9 million at December 31, 2006 to $1.9 million at June 30, 2007, while the allowance for these loans decreased during this same period by $213 thousand. Net loan charge-offs for the six months ending June 30, 2006 were $125 thousand, while the same period in 2007 experienced net loan recoveries of $304 thousand. The recoveries for 2007 directly impacted the aforementioned negative provision of $138 thousand.

The allowance as a percentage of total impaired and potential problem loans has increased from 52.6% at December 31, 2006 to 87.9% at June 30, 2007. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 28.0% at December 31, 2006 to 23.0% at June 30, 2007. Management believes the current level of allowance for loan losses to be adequate at this time.

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $20.1 million at June 30, 2007, with available credit of $15.1 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $32.0 million, access to borrowings from the Federal Reserve Bank discount window, and the sale of securities under agreements to repurchase. In addition, the Company issues commercial paper and has secured long-term debt from other sources. Total debt from these sources aggregated $55.7 million at June 30, 2007, compared to $42.3 million at December 31, 2006.

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

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

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

Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. The Company’s market risk profile has not changed significantly since December 31, 2006.

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

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

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

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Part II. OTHER INFORMATION

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

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

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

On March 20, 2007 the Board of Directors of Uwharrie Capital Corp unanimously approved the repurchase of 95,252, shares of its common stock at a cost of $566,807. This resolution is under a Stock Repurchase Plan that is contingent upon maintaining a well capitalized regulatory capital ratio. The purchase price under the plan is set on a quarterly basis, based on an independent valuation of the Company’s stock price, and is approved by the Board. The Board individually approves stock repurchases that exceed $50,000 in any one transaction.

The Company did not repurchase any shares of its common stock during the three months ended June 30, 2007. On June 28, 2007, the Executive Committee of Uwharrie Capital Corp mandated by resolution that the Company could repurchase up to $375,000 of its common stock during the third quarter of 2007.

None

The Company’s annual meeting of shareholders was held on Tuesday, May 8, 2007 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 30, 2007, (1) to elect six (6) directors of the Company to three (3) year terms and (2) to ratify the appointment of the Company’s independent public accountants for 2007, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.

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