Uwharrie Capital (UWHR) 10-Q 2005 Q2 Quarterly report

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

COMMISSION FILE NUMBER 0-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	56-1814206
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
132 North First Street, Albemarle, North Carolina	28001
(Address of Principal Executive Office)	(Zip Code)

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

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 past 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

Number of shares of Common Stock outstanding as of July 31, 2005; 6,983,701

This report contains 24 pages.

Table of Contents

			Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
		Consolidated Balance Sheets June 30, 2005 and December 31, 2004	3
		Consolidated Statements of Income for the Three Months and the Six Months Ended June 30, 2005 and 2004	4
		Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2005	5
		Consolidated Statements of Cash Flows Six Months Ended June 30, 2005 and 2004	6
		Notes to Consolidated Financial Statements	7
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		17
Item 4 -	Controls and Procedures		18
Part II.	OTHER INFORMATION
Item 1 -	Legal Proceedings		18
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3 -	Defaults Upon Senior Securities		19
Item 4 -	Submission of Matters to a Vote of Security Holders		19
Item 5 -	Other Information		20
Item 6 -	Exhibits		20

-2-

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

	June 30, 2005 (Unaudited)			December 31, 2004*
ASSETS
Cash and due from banks	$	14,681,372		$	11,449,899
Interest-earning deposits with banks		2,199,849			4,024,870
Federal funds sold		—			4,100,000
Securities available for sale, at fair value		28,505,221			28,523,869
Loans		263,423,825			263,738,272
Less allowance for loan losses		5,069,019			4,982,891
Net Loans		258,354,806			258,755,381
Premises and equipment, net		8,230,864			8,317,497
Interest receivable		1,399,774			1,273,777
Federal Home Loan Bank stock		2,217,300			2,385,300
Bank owned life insurance		4,838,227			4,758,727
Goodwill		987,436			987,436
Other assets		5,348,343			4,685,239
Total assets	$	326,763,192		$	329,261,995
LIABILITIES
Deposits:
Demand noninterest-bearing	$	46,160,449		$	36,866,146
Interest checking and money market accounts		63,006,492			80,393,133
Savings deposits		37,638,542			39,852,601
Time deposits, $100,000 and over		36,986,457			36,966,834
Other time deposits		61,168,956			52,860,046
Total Deposits		244,960,896			246,938,760
Short-term borrowed funds		21,012,472			14,693,424
Long-term debt		31,699,767			39,103,025
Interest payable		362,421			301,930
Other liabilities		1,279,556			1,069,057
Total liabilities		299,315,112			302,106,196
Off balance sheet items, commitments and contingencies (Note 6)
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; Shares issued and outstanding 6,999,920 and 7,057,755 shares, respectively		8,749,900			8,822,194
Additional paid-in capital		11,740,773			12,043,348
Unearned ESOP compensation		(939,512	)		(964,935	)
Undivided profits		7,167,841			6,469,142
Accumulated other comprehensive income		729,078			786,050
Total shareholders’ equity		27,448,080			27,155,799
Total liabilities and shareholders’ equity	$	326,763,192		$	329,261,995

(*) Derived from audited consolidated financial statements.

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
INTEREST INCOME
Loans, including fees	$	4,205,819		$	3,480,028	$	8,222,929		$	6,827,282
Investment securities
US Treasury		24,392			28,213		48,634			52,584
US Government agencies and corporations		125,977			107,578		252,409			204,363
State and political subdivisions		161,626			181,879		321,349			362,789
Other		32,160			19,878		67,317			38,739
Interest-earning deposits with banks and Federal funds sold		44,137			6,035		89,459			22,311
Total interest income		4,594,111			3,823,611		9,002,097			7,508,068
INTEREST EXPENSE
Time deposits, $100,000 and over		270,621			183,711		509,653			376,093
Other interest-bearing deposits		694,350			418,858		1,295,577			831,825
Short-term borrowed funds		125,994			53,496		210,840			117,489
Long-term debt		409,038			452,518		843,220			897,688
Total interest expense		1,500,003			1,108,583		2,859,290			2,223,095
Net interest income		3,094,108			2,715,028		6,142,807			5,284,973
Provision for loan losses		145,000			252,000		360,000			401,000
Net interest income after provision for loan losses		2,949,108			2,463,028		5,782,807			4,883,973
Non-interest income
Service charges on deposit accounts		392,870			355,133		754,386			683,847
Other service fees and commissions		426,431			277,674		852,554			605,167
Gain/(loss) on sale of securities		(20,232	)		2,374		(16,272	)		2,374
Gain on sale fixed assets/other assets		49,101			15,802		49,101			15,802
Income from mortgage loan sales		130,590			130,332		308,439			424,675
Other income		69,078			119,537		147,090			424,674
Total non-interest income		1,047,838			900,852		2,095,298			2,156,539
Non-interest expenses
Salaries and employee benefits		1,979,547			1,706,878		3,905,543			3,493,930
Net occupancy expense		151,582			148,435		305,277			298,351
Equipment expense		164,438			157,345		330,712			312,747
Data processing costs		206,357			198,858		411,544			404,718
Other noninterest expense		1,022,887			911,594		1,996,710			1,757,681
Total non-interest expense		3,524,811			3,123,110		6,949,786			6,267,427
Income before taxes		472,135			240,770		928,319			773,085
Income taxes		113,270			46,920		229,620			169,150
Net income	$	358,865		$	193,850	$	698,699		$	603,935
Net income per common share
Basic	$	0.05		$	0.03	$	0.10		$	0.09
Diluted	$	0.05		$	0.03	$	0.10		$	0.09
Weighted average shares outstanding
Basic		6,851,547			6,940,971		6,861,265			6,954,696
Effect of dilutive stock options		168,689			146,602		168,966			148,177
Diluted		7,020,236			7,087,573		7,030,231			7,102,873

-4-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

	Common Stock					Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits		Accumulated Other Comprehensive Income			Total
	Shares		Amount
Balance, December 31, 2004	7,057,755		$	8,822,194		$	12,043,348		$	(964,935	)	$	6,469,142	$	786,050		$	27,155,799
Comprehensive Income
Net income	—			—			—			—			698,699		—			698,699
Net decrease in fair value of securities available for sale	—			—			—			—			—		(56,972	)		(56,972	)
Total Comprehensive Income																		641,727
Release of ESOP shares	—			—			18,500			25,423			—		—			43,923
Common stock issued pursuant to:
Stock options exercised	25,689			32,111			92,369			—			—		—			124,480
Repurchase of common stock	(83,524	)		(104,405	)		(413,444	)		—			—		—			(517,849	)
Balance, June 30, 2005	6,999,920		$	8,749,900		$	11,740,773		$	(939,512	)	$	7,167,841	$	729,078		$	27,448,080

The accompanying notes are an integral part

of the consolidated financial statements.

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months ended June 30,
	2005			2004
Cash flows from operating activities
Net income	$	698,699		$	603,935
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		325,300			301,257
Net amortization of security premiums/discounts		13,040			41,414
Provision for loan losses		360,000			401,000
Net realized (gain) loss on available for sale securities		16,272			(2,374	)
Income from mortgage loan sales		(308,439	)		(424,675	)
Proceeds from sales of loans held for sale		22,281,258			15,004,713
Origination of loans held for sale		(22,824,822	)		(15,860,005	)
Gain on sale of fixed assets/other assets		(49,101	)		(15,802	)
Increase in cash surrender value of life insurance		(79,500	)		(59,101	)
Release of ESOP shares		43,923			4,478
Net change in interest receivable		(125,997	)		(43,859	)
Net change in other assets		171,600			(523,050	)
Net change in interest payable		60,491			(3,745	)
Net change in other liabilities		210,499			51,920
Net cash provided (used) by operating activities		793,223			(508,092	)
Cash flows from investing activities
Net decrease in interest-earning deposits with banks		1,825,020			624,696
Net decrease in federal funds sold		4,100,000			—
Proceeds from sales, maturities and calls of securities available for sale		1,370,181			2,059,811
Purchase of securities available for sale		(1,473,563	)		(4,679,886	)
Net (increase) decrease in loans		176,621			(19,542,279	)
Proceeds from sale of fixed assets/other assets		134,593			23,542
Purchase of premises and equipment		(239,159	)		(522,148	)
Net cash provided (used) in investing activities		5,893,693			(22,036,264	)
Cash flows from financing activities
Net increase (decrease) in deposit accounts		(1,977,864	)		20,199,251
Net increase in short-term borrowed funds		6,319,048			6,406,242
Net increase in long-term borrowed funds		(7,403,258	)		(3,527,879	)
Repurchases of common stock		(517,849	)		(1,050,888	)
Net proceeds from issuance of common stock		124,480			539,649
Net cash provided (used) by financing activities		(3,455,443	)		22,566,375
Increase in cash and cash equivalents		3,231,473			22,019
Cash and cash equivalents, beginning of period		11,449,899			11,313,931
Cash and cash equivalents, end of period	$	14,681,372		$	11,335,950

-6-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

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

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, and 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 2004 annual report on Form 10-KSB. 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.

The components of comprehensive income and related tax effects are as follows:

(in thousands)	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Net Income	$	359		$	194		$	699		$	604
Other comprehensive income (loss)
Unrealized holding gains (losses) on Available for sale securities		402			(1,049	)		(108	)		(793	)
Related tax effect		(155	)		404			41			305
Reclassification of loss Recognized in net income		20			—			16			—
Related tax effect		(8	)		—			(6	)		—
Total other comprehensive income (loss)		259			(645	)		(57	)		(488	)
Comprehensive income(loss)	$	618		$	(451	)	$	642		$	116

-7-

Note 3 – Per Share Data

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 income divided by the weighted average number of common shares outstanding or assumed to be outstanding.

On October 20, 2004, the Company’s Board of Directors declared a 3% stock dividend payable on December 3, 2004 to shareholders of record on November 19, 2004. 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.

Note 4 – Loans

Loans outstanding at period end:

(in thousands)	June 30, 2005		December 31, 2004
Commercial	$	37,966	$	37,718
Real estate-construction		22,430		25,480
Real estate-residential		102,673		102,776
Real estate-commercial		82,337		81,283
Consumer loans		14,364		13,488
Loans held for sale		3,610		2,903
All other loans		44		90
Total	$	263,424	$	263,738

Analysis of the allowance for loan losses:

(in thousands)	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Balance at beginning of period	$	4,988		$	3,244		$	4,983		$	3,224
Provision charged to operations		145			252			360			401
Charge-offs		(78	)		(60	)		(298	)		(208	)
Recoveries		14			7			24			26
Net charge-offs		(64	)		(53	)		(274	)		(182	)
Balance at end of period	$	5,069		$	3,443		$	5,069		$	3,443

Note 5 – Stock-Based Compensation

Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting

-8-

Principles Board Opinion No. 25,Accounting for Stock Issued to Employees,whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value at the grant date and, under Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.

	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2005			2004			2005			2004
Net income as reported	$	359		$	194		$	699		$	604
Deduct: Total stock-based employee compensation expense determined Under fair value method for all awards, net of related tax effects		(22	)		(18	)		(88	)		(37	)
Pro forma	$	337		$	176		$	611		$	567
Basic net income per common share
As reported	$	.05		$	.03		$	.10		$	.09
Pro forma		.05			.03			.09			.08
Diluted net income per share
As reported		.05			.03			.10			.09
Pro forma		.05			.02			.09			.08

Note 6 - Commitments and Contingencies

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

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At June 30, 2005, outstanding financial instruments whose contract amounts represent credit risk were approximately (in thousands):

Commitments to extend credit	$	59,612
Credit card commitments		7,314
Standby letters of credit		450
Total commitments	$	67,376

-9-

Note 7 – Recent Accounting Pronouncements

SOP 03-3

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3,Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies from “carrying over” or creating a valuation allowance in the initial accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP on January 1, 2005 did not have a material impact on the Company’s financial position or results of operations.

FAS 123(R)

In December 2004, the FASB issued SFAS No. 123(R),Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first interim reporting period of the first fiscal year that begins on or after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the fiscal years ended December 31, 2004 and 2003 would have decreased by approximately $77,000 and $90,000 respectively. Accordingly, the adoption of SFAS No. 123(R) is expected to have a material effect on our consolidated financial statements.

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, 2005 and December 31, 2004.

During the six months ended June 30, 2005, total assets decreased $2.5 million or 0.8% from $329.3 million to $326.8 million. This decrease in the Company’s assets resulted primarily from a decrease in our liquid assets, consisting of cash and cash equivalents and investment securities of $2.7 million. Net loans receivable decreased $401 thousand during the period, while deposits declined by $2.0 million.

Cash and cash equivalents decreased $2.7 million or 13.8% during the period. Interest earning deposits with banks declined $1.8 million and fed funds sold were reduced by $4.1 million. This reduction in funds was used to repay short term borrowings during the period. Vault cash for the period decreased $220 thousand or 9.8%.

-10-

Investment securities decreased $19 thousand for the six months. During the period one bond was sold and replaced with a mortgage-backed security and a municipal bond. This was done to improve the asset liability position in the rising rate environment. These transactions, coupled with a municipal bond being called and normal principal reduction payments accounted for the decrease.

Net loans receivable decreased $401 thousand to $258.4 million during the period ended June 30, 2005. The Company experienced positive growth trends in their lending area; however the growth was negatively impacted by several large loan payoffs during the period. The allowance for loan loss was $5.1 million at June 30, 2005, which represents 1.92% of the loan portfolio.

Federal Home Loan Bank stock decreased $168 thousand or 7.0% during the first six months of 2005. FHLB stock ownership is a requirement for member banks that utilize FHLB for borrowing funds. The amount of stock owned by each member bank is based on the amount of borrowings outstanding.

Other assets increased $663 thousand or 14.2% during the period, increasing from $4.7 million at December 31, 2004 to $5.3 million at June 30, 2005. This increase was primarily due to an increase of $750 thousand in other real estate owned during the period. At June 30, 2005 the Company had $1.2 million in other real estate owned.

Customer deposits, our primary funding source, experienced a slight decline during the period, decreasing by $2.0 million to $245.0 million. Increases in non-interest bearing demand accounts of $9.3 million and time deposits of $8.3 million were offset by reductions in savings accounts of $2.2 million and interest bearing demand accounts of $17.4 million. As interest rates have continued to rise a portion of the funds that have been in money market accounts have shifted over to time deposits accounting for part of the change in those categories.

The Company utilizes both short-term and long-term borrowings as funding sources. During the period, total borrowings outstanding were reduced $1.1 million at June 30, 2005. $43.2 million of the total borrowings of $52.7 million were attributed to Federal Home Loan Bank advances.

At June 30, 2005, total shareholders’ equity was $27.4 million, an increase of $292 thousand from December 31, 2004. Net income for the period was $699 thousand and the Company received $124 thousand from the exercise of stock options. These increases were offset by a decrease in unrealized gains on our investment securities, net of tax of $57 thousand and by the Company’s repurchase of 83,524 shares of common stock at a cost of $518 thousand.

At June 30, 2005, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended June 30, 2005 and 2004.

Earnings

Uwharrie Capital Corp reported net earnings of $359 thousand or $.05 per share for the three months ended June 30, 2005, as compared to $194 thousand or $.03 for the three months ended June 30, 2004, an increase of $165 thousand or $.02 per share.

-11-

Net Interest Income

The Company’s primary source of income, net interest income, increased $379 thousand or 14.0% for the period ending June 30, 2005, as compared to the same period for 2004. Increased levels of interest earning assets, coupled with interest rate increases by the Federal Reserve Bank during 2005 are the attributing factors for this increase. Refer to the six month discussion on page 15 for further information.

Provision and Allowance for Loan Losses

Management considers asset quality to be of primary importance, and therefore employs a formal internal loan review process to ensure adherence to the Company’s lending policies. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. 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. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in the Company’s market area and other factors. 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. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

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. 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, as described above, 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

-12-

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

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

The provision for loan losses was $145 thousand and $252 thousand for the quarters ended June 30, 2005 and 2004 respectively, resulting in a decrease of $107 thousand. Net loan charge-offs, were $64 thousand or .02% of average loans outstanding for the quarter ended June 30, 2005, compared to $53 thousand or .02% of average loans outstanding for the same period in 2004.

Our allowance for loan losses increased to $5.1 million at June 30, 2005, an increase of $86 thousand during the period. The allowance expressed as a percentage of total loans increased from 1.89% at December 31, 2004 to 1.92% at June 30, 2005. Total nonperforming loans decreased $472 thousand during the six months of 2005. The ratio of nonperforming loans to total loans decreased from 1.29% at December 31, 2004 to 1.10% at June 30, 2005. The Company’s allowance methology provides for a range of estimated losses inherent within the loan portfolio. The recorded $5.1 million continues to comply with the Company’s allowance methodology and is considered by management to be adequate to absorb probable losses inherent in the loan portfolio.

The following table sets forth information with respect to nonperforming assets for the dates indicated.

-13-

Schedule of Nonperforming Assets

(In thousands)	June 30, 2005			December 31, 2004
Nonaccrual loans	$	2,683		$	3,376
Restructured loans		221			—
Total nonperforming loans		2,904			3,376
Other real estate owned		1,231			481
Total nonperforming assets	$	4,135		$	3,857
Accruing loans past due 90 days or more		18			1,150
Allowance for loan losses		5,069			4,983
Allowance for loan losses to total loans		1.92	%		1.89	%
Allowance for loan losses to nonperforming loans		188.93	%		147.59	%
Nonperforming loans to total loans		1.10	%		1.29	%
Nonperforming assets to total assets		1.27	%		1.17	%

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 for the quarter ended June 30, 2005 was $1.0 million compared to $901 thousand for the same period in 2004, an increase of $147 thousand or 16.3%. Service charges on deposit accounts and other service fees and commissions produced earnings of $819 thousand for the three month period ending June 30, 2005 compared to $633 thousand for the same period in 2004, an increase of $186 thousand or 29.4%. Increases in fee income on managed accounts and brokerage commissions account attributed to this increase. This increase was offset by a decline in other income of $50 thousand for the three month period.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2005 was $3.5 million compared to $3.1 million for the same period of 2004, an increase of $402 thousand. Salaries and employee benefits, the largest component of noninterest expense increased $273 thousand, from $1.7 million for the quarter ending June 30, 2004 to $2.0 million for the same period in 2005. Personnel costs increased due to additional staff to support the growth, normal salary adjustments and incentives and associated benefit costs. Other operating expense totaled $1.0 million for the three months in 2005 compared to $911 thousand. The table below reflects the changes in other operating expenses.

Other operating expenses

(in thousands)	Three months ended June 30,
	2005		2004
Professional fees and services	$	152	$	123
Marketing and donations		125		117
Office supplies, printing and postage		115		106
Telephone and data lines		48		51
Electronic banking expenses		122		107
Software costs		59		75
Other		402		332
Total	$	1,023	$	911

-14-

Income Tax Expense

Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and tax advantaged loans. Income tax expense calculated for the quarter ended June 30, 2005 totaled $113 thousand compared to $47 thousand in the quarter ended June 30, 2004. The effective tax rate increased from 19.5% for the period ended June 30, 2004 to 24.0% for the three months ended June 30, 2005, due to a decrease in nontaxable income.

Comparison of Results of Operations For the Six Months Ended June 30, 2005 and 2004.

Earnings

Uwharrie Capital Corp reported net earnings of $699 thousand or $.10 per share for the six months ended June 30, 2005, as compared to $604 thousand or $.09 per share for the six months ended June 30, 2004, an increase of $95 thousand or $.01 per share.

Net Interest Income

Net interest income for the six months ended June 30, 2005 was $6.1 million as compared with $5.3 million during the quarter ending June 30, 2004 an increase of $858 thousand or 16.2%. This increase resulted from increased levels of interest-earning assets coupled with a 64 basis point increase in the yield on interest-earning assets. The yield on interest earning assets for the current six months was 6.16%. The cost of interest-bearing liabilities increased 41 basis points to 2.25%. The net interest spread increased 23 basis points to 3.91%. The recent interest rate hikes by the Federal Reserve coupled with the fact that a large majority of our loan portfolio has adjustable rate terms factored into these increases. The net interest margin for the six months of 2005 was 4.24%, as compared to 3.93% for the same period in 2004.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2005 and 2004.

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

($ in thousands)	Average Level				Income/Expenses				Rate/Yield
	2005		2004		2005		2004		2005		2004
Interest-earning assets:
Loans (1)	$	261,574	$	242,133	$	8,127	$	6,729	6.27	%	5.59	%
Nontaxable loans (2)		3,972		4,118		96		98	7.48	%	7.39	%
Taxable securities		17,396		18,525		428		356	4.95	%	3.86	%
Nontaxable securities (2)		10,762		11,765		262		303	7.55	%	7.98	%
Other (3)		7,183		4,778		89		22	2.50	%	0.93	%
Total interest-earning assets		300,887		281,319		9,002		7,508	6.16	%	5.52	%
Interest-bearing liabilities:
Interest-bearing deposits		204,824		184,798		1,805		1,208	1.78	%	1.31	%
Short-term borrowings		15,054		16,172		211		117	2.93	%	1.45	%
Long-term borrowings		36,625		42,358		843		898	4.60	%	4.26	%
Total interest bearing liabilities		256,503		243,328		2,859		2,223	2.25	%	1.84	%
Net interest spread	$	44,384	$	37,991	$	6,143	$	5,285	3.91	%	3.68	%
Net interest margin (2) (% of earning assets)									4.24	%	3.93	%

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

-15-

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

(3) Includes federal funds sold and due from banks, interest-earning.

The provision for loan losses was $360 thousand and $401 thousand for the six months ended June 30, 2005 and 2004, respectively, resulting in an decrease of $41 thousand. Net loan charge-offs, were $274 thousand or .10% of average loans outstanding for the quarter ended June 30, 2005, compared to $182 thousand or .08% of average loans outstanding for the same period in 2004.

Noninterest Income

Total noninterest income for the six months ended June 30, 2005 was $2.1 million compared to $2.2 million for the comparable period in 2004, a decrease of $61 thousand. Other noninterest income decreased $278 thousand from $425 thousand for the period ending June 30, 2004 to $147 thousand for the current period. The primary factor contributing to the decrease was the impact of a one time payment related to a government guaranteed loan during the first quarter of 2004 of $171 thousand. The increase in long-term interest rates resulted in a reduction of refinanced mortgages that in turn attributed to the decrease of $116 thousand in income from the generation and sale of mortgage loans for the six months ended June 30, 2005, compared to the same period in 2004. These decreases were offset by an increase of $318 thousand in service charges on deposit accounts and other service fees and commissions. The major component in this increase was an increase of $167 thousand in investment related fees.

Noninterest Expense

Noninterest expenses for the six months ended June 30, 2005 were $6.9 million compared to $6.3 million for the same period of 2004, an increase of $682 thousand or 10.9%. Noninterest expenses as a percentage of average assets increased from 4.11% for the period ended June 30, 2004 to 4.26% for the same period in 2005.

Salaries and employee benefits, the largest component of noninterest expense increased $412 thousand or 11.8% from $3.5 million for the six months ended June 30, 2004 to $3.9 million for the same period in 2005. Personnel costs increased due to the addition of two key executive positions, additional staff to support the Company’s growth, normal salary adjustments and incentives and associated benefit costs.

Net occupancy expense and equipment expense combined increased by $25 thousand to $636 thousand for the period ended June 30, 2005 compared to $611 thousand for the same period of 2004.

All other operating expenses totaled $2.0 million in the period ended June 30, 2005 compared to $1.8 million the prior year, an increase of $239 thousand, as reflected in the table below:

Other operating expenses

(in thousands)	Six months ended June 30,
	2005		2004
Professional fees and services	$	293	$	224
Marketing and donations		227		191
Office supplies, printing and postage		215		207
Telephone and data lines		101		110
Electronic banking expenses		231		203
Software costs		110		160
Other		820		663
Total	$	1,997	$	1,758

-16-

Income Tax Expense

Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and tax advantaged loans. Income tax expense calculated to date in 2005 totaled $230 thousand compared to $169 thousand in 2004. The effective tax rate increased from 21.9% for the period ended June 30, 2004 to 24.7% for the six months ended June 30, 2005, due to a decrease in nontaxable income.

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $20.2 million at June 30, 2005, established borrowing relationships with the Federal Home Loan Bank, with available credit of $43.0 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 $52.7 million at June 30, 2005, compared to $53.8 million at December 31, 2004.

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

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

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

Accounting and Regulatory Matters

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These

-17-

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, 2004. See Financial Table 5 of the Company’s Annual Report for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 28, 2005, for additional analysis of the Company’s market risk.

Item 4. Controls and Procedures

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

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Issuer Purchases of Equity Securities

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2005.

	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)	(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
April 1, 2005 Through April 30, 2005	—	$	6.20	—	$	484,094
May 1, 2005 Through May 31, 2005	14,737	$	6.20	—	$	392,725
June 1, 2005 Through June 30, 2005	11,875	$	6.20	—	$	319,100
Total	26,612	$	6.20

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

-18-

(2) On December 21, 2004 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 first quarter of 2005. On March 15, 2005, the Executive Committee mandated by resolution that an additional $461,948 of its common stock could be repurchased up through the end of the second quarter 2005. Both of these resolutions are under a Stock Repurchase Plan that is contingent upon maintaining a well capitalized regulatory capital ratio. The purchase price under the plan is set on a quarterly basis, based on an independent valuation of the Company’s stock price, and is approved by the Board. The Board individually approves stock repurchases that exceed $50,000 in any one transaction or when repurchases would exceed the quarterly allocation.

Item 3. Defaults Upon Senior Securities

None

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

The Company’s annual meeting of shareholders was held on Tuesday, May 10, 2005 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 28, 2005, (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 2005, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.

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

Nominee	For	Withheld
Joe S. Brooks	4,376,625	14,483
Barton D. Burpeau, Jr	4,376,519	14,589
B. Franklin Lee	4,351,761	39,347
W. Chester Lowder	4,372,103	19,005
John P. Murray, MD	4,372,041	19,067
Susan J. Rourke	4,351,761	39,347

The following eleven directors continued in office: Robert P. Barbee, Thomas M. Hearne, Jr., James E. Nance, Emmett S. Patterson, Timothy J. Propst, Donald P. Scarborough, John W. Shealy, Jr., Michael E. Snyder Sr., Douglas L. Stafford, Emily M. Thomas, and Hugh E. Wallace.

-19-

Proposal (2) To ratify the appointment of Dixon Hughes PLLC as the Company’s independent public accountants for 2005.

For	4,373,160
Against	297
Abstain	17,651

Item 5. Other Information

None

Item 6. Exhibits

(a) Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13(a) – 14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13(a) – 14(a)
32	Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002

-20-

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned who is thereunto duly authorized.

	UWHARRIE CAPITAL CORP
	(Registrant)
Date: August 9, 2005	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer
Date: August 9, 2005	By:	/s/ Barbara S. Williams
		Barbara S. Williams
		Principal Financial Officer

-21-