Uwharrie Capital (UWHR) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

OR

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

For the transition period from                    to                    .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

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

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

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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,478,104 shares of common stock outstanding as of August 5, 2013.

Table of Contents

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Balance Sheets June 30, 2013 and December 31, 2012		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012		4
	Consolidated Statements of Comprehensive Income for the Three And Six Months Ended June 30, 2013 and 2012		5
	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2013		6
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2013 and 2012		7
	Notes to Consolidated Financial Statements		8
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		37
Item 4 -	Controls and Procedures		37
Part II.	OTHER INFORMATION
Item 1 -	Legal Proceedings		38
Item 1A -	Risk Factors		38
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3 -	Defaults Upon Senior Securities		39
Item 4 -	Mine Safety Disclosures		40
Item 5 -	Other Information		40
Item 6 -	Exhibits		40
	Exhibit Index		43

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

	June 30, 2013 (Unaudited)			December 31, 2012*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	10,294		$	8,877
Interest-earning deposits with banks		36,836			72,851
Securities available for sale, at fair value		120,571			91,638
Loans held for sale		676			5,373
Loans:
Loans held for investment		321,793			329,183
Less allowance for loan losses		(5,481	)		(6,801	)
Net loans held for investment		316,312			322,382
Premises and equipment, net		14,041			14,952
Interest receivable		1,840			1,753
Restricted stock		1,824			2,265
Bank owned life insurance		6,456			6,394
Other real estate owned		9,454			8,713
Prepaid assets		1,047			635
Other assets		10,307			9,174
Total assets	$	529,658		$	545,007
LIABILITIES
Deposits:
Demand noninterest-bearing	$	74,268		$	70,347
Interest checking and money market accounts		222,114			211,066
Savings deposits		46,922			43,336
Time deposits, $100,000 and over		47,671			53,449
Other time deposits		69,992			79,414
Total deposits		460,967			457,612
Short-term borrowed funds		9,372			18,690
Long-term debt		11,168			12,673
Interest payable		232			270
Other liabilities		4,810			11,449
Total liabilities		486,549			500,694
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)		1,686			1,584
Off balance sheet items, commitmentsand contingencies (Note 9)
SHAREHOLDERS’ EQUITY
Preferred stock, no par value: 10,000,000 shares authorized;
2,258 and 10,000 shares of series A issued and outstanding;		2,258			10,000
500 shares of series B issued and outstanding		500			500
Discount on preferred stock		(50	)		(100	)
Common stock, $1.25 par value: 20,000,000 shares issuedauthorized; shares issued and outstanding 7,478,104 and 7,502,496 shares, respectively		9,348			9,378
Additional paid-in capital		12,034			12,201
Unearned ESOP compensation		(861	)		(875	)
Undivided profits		10,614			10,138
Accumulated other comprehensive income (loss)		(173	)		1,487
Total Uwharrie Capital shareholders’ equity		33,670			42,729
Noncontrolling interest		7,753			—
Total shareholders’ equity		41,423			42,729
Total liabilities and shareholders’ equity	$	529,658		$	545,007

(*) Derived from audited consolidated financial statements

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	4,449		$	4,941		$	8,876		$	10,148
Investment securities
US Treasury		100			140			193			287
US Government agencies and corporations		202			204			381			393
State and political subdivisions		62			89			128			180
Interest-earning deposits with banks and federal funds sold		54			40			109			72
Total interest income		4,867			5,414			9,687			11,080
Interest Expense
Interest checking and money market accounts		112			134			228			285
Savings deposits		42			53			84			105
Time deposits, $100,000 and over		153			200			327			415
Other time deposits		182			256			395			520
Short-term borrowed funds		43			81			123			155
Long-term debt		166			199			337			441
Total interest expense		698			923			1,494			1,921
Net interest income		4,169			4,491			8,193			9,159
Provision for (recovery of) loan losses		(405	)		363			(774	)		703
Net interest income after provision (recovery of) for loan losses		4,574			4,128			8,967			8,456
Noninterest Income
Service charges on deposit accounts		392			436			797			868
Other service fees and commissions		841			861			1,634			1,591
Gain on sale of securities (includes reclassification of $14 from accumulated other comprehensive income)		—			16			14			16
Gain (loss) on fixed assets and other assets		(22	)		25			225			296
Income from mortgage loan sales		642			667			1,482			1,476
Other income		109			118			224			238
Total noninterest income		1,962			2,123			4,376			4,485
Noninterest Expense
Salaries and employee benefits		3,060			3,157			6,152			6,263
Net occupancy expense		276			285			550			570
Equipment expense		186			183			354			371
Data processing costs		192			223			392			434
Office supplies and printing		48			81			111			152
Foreclosed real estate expense		948			342			1,123			810
Professional fees and services		243			127			481			172
Marketing and donations		203			152			376			338
Electronic banking expense		249			225			471			454
Software amortization and maintenance		137			141			281			283
FDIC insurance		126			171			297			345
Other noninterest expense		618			535			1,327			1,196
Total noninterest expense		6,286			5,622			11,915			11,388
Income before income taxes		250			629			1,428			1,553
Income taxes (includes reclassification of $5 from accumulated other comprehensive income)		94			228			509			452
Net income	$	156		$	401		$	919		$	1,101
Consolidated net income	$	156			401			919			1,101
Less: net income attributable to noncontrolling Interest		(114	)		—			(217	)		—
Net income attributable to Uwharrie Capital Corp		42			401			702			1,101
Dividends - preferred stock		(65	)		(161	)		(226	)		(323	)
Net income (loss) available to common shareholders	$	(23	)	$	240		$	476		$	778
Net income (loss) per common share
Basic	$	0.00		$	0.03		$	0.07		$	0.10
Diluted	$	0.00		$	0.03		$	0.07		$	0.10
Weighted average shares outstanding
Basic		7,287,662			7,431,969			7,297,048			7,435,053
Diluted		7,287,662			7,431,969			7,297,048			7,435,053

See accompanying notes

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in thousands)
Net Income	$	156		$	401		$	919		$	1,101
Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities		(2,413	)		366			(2,537	)		(48	)
Related tax effect		844			(122	)		886			17
Reclassification of (gain) loss recognized in net income		—			(16	)		(14	)		(16	)
Related tax effect		—			6			5			6
Total other comprehensive income (loss)		(1,569	)		234			(1,660	)		(41	)
Comprehensive income (loss)		(1,413	)		635			(741	)		1,060
Less: Comprehensive income (loss) attributable to noncontrolling interest		(103	)		—			(217	)		—
Comprehensive income (loss) attributable to Uwharrie Capital	$	(1,516	)	$	635		$	(958	)	$	1,060

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

	Number Common Shares Issued			Preferred Stock Series A			Preferred Stock Series B		Discount on Preferred Stock			Common Stock			Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
(dollars in thousands, except share data)
Balance, December 31, 2012		7,502,496		$	10,000		$	500	$	(100	)	$	9,378		$	12,201		$	(875	)	$	10,138		$	1,487		$	—		$	42,729
Net Income		—			—			—		—			—			—			—			702			—			217			919
Repurchase of common stock		(24,392	)		—			—		—			(30	)		(42	)		—			—			—			—			(72	)
Other comprehensive loss		—			—			—		—			—			—			—			—			(1,660	)		—			(1,660	)
Release of ESOP shares		—			—			—		—			—			(23	)		46			—			—			—			23
Increase in ESOP notes receivable		—			—			—		—			—			—			(32	)		—			—			—			(32	)
Stock compensation expense		—			—			—		—			—			—			—			—			—			—			—
Reclass to mezzanine capital		—			—			—		—			—			(102	)		—			—			—			—			(102	)
Repayment of preferred stock series A		—			(7,742	)		—		—			—			—			—			—			—			—			(7,742	)
Issuance of preferred stock series B (noncontrolling interest)		—			—			—		—			—			—			—			—			—			7,855			7,855
Record costs of series B preferred stock (noncontrolling interest)		—			—			—		—			—			—			—			—			—			(113	)		(113	)
Record preferred stock dividend series B (noncontrolling interest)		—			—			—		—			—			—			—			—			—			(206	)		(206	)
Record preferred stock dividend and discount accretion		—			—			—		50			—			—			—			(226	)		—			—			(176	)
Balance, June 30, 2013		7,478,104		$	2,258		$	500	$	(50	)	$	9,348		$	12,034		$	(861	)	$	10,614		$	(173	)	$	7,753		$	41,423

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2013			2012
	(dollars in thousands)
Cash flows from operating activities
Net income	$	919		$	1,101
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation		464			480
Net amortization of security premiums/discounts		850			537
Net amortization of mortgage servicing rights		430			410
Impairment of foreclosed real estate		758			527
Provision for (recovery of) loan losses		(774	)		703
Stock compensation		—			2
Net realized (gain) loss on sales / calls available for sales securities		(14	)		(16	)
Income from mortgage loan sales		(1,482	)		(1,476	)
Proceeds from sales of loans held for sale		51,667			52,776
Origination of loans held for sale		(45,488	)		(50,629	)
(Gain) loss on sale of premises, equipment and other assets		(229	)		(276	)
Increase in cash surrender value of life insurance		(62	)		(129	)
(Gain) loss on sales of foreclosed real estate		4			(20	)
Release of ESOP shares		23			23
Net change in interest receivable		(87	)		116
Net change in other assets		(738	)		881
Net change in interest payable		(38	)		(29	)
Net change in other liabilities		742			27
Net cash provided by (used in) operating activities		6,945			5,008
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		8,438			15,807
Purchase of securities available for sale		(40,758	)		(26,055	)
Net decrease in loans		4,537			22,449
Proceeds from sales of premises, equipment and other assets		949			—
Purchase of premises and equipment		(273	)		(402	)
Proceeds from sales of foreclosed real estate		804			1,529
Investment in other assets		(390	)		(260	)
Net decrease in restricted stock		475			785
Net cash provided by (used in) investing activities		(26,218	)		13,853
Cash flows from financing activities
Net increase in deposit accounts		3,355			10,618
Net decrease in short-term borrowed funds		(9,318	)		(2,040	)
Net decrease in long-term debt		(1,505	)		(10,555	)
Proceeds from preferred stock series B issued by subsidiaries		360			—
Repayment of preferred stock series A		(7,742	)		—
Increase in unearned ESOP compensation		(32	)		(82	)
Repurchase of common stock		(72	)		(68	)
Dividend and discount accretion on preferred stock		(176	)		(273	)
Dividend and cost accretion on noncontrolling interest		(195	)		—
Net cash provided (used in) in financing activities		(15,325	)		(2,400	)
Increase (decrease) in cash and cash equivalents		(34,598	)		16,641
Cash and cash equivalents, beginning of period		81,728			28,687
Cash and cash equivalents, end of period	$	47,130		$	45,148
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,532		$	1,950
Income taxes paid		617			57
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax	$	(1,660	)	$	(41	)
Loans transferred to foreclosed real estate		2,307			858
Company financed sales of other real estate owned		—			(188	)
Net change in ESOP liability		102			—

See accompanying notes

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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 generally accepted accounting principles in the United States of America (“GAAP”) 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.

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 2012 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 - Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other accumulated 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 accumulated 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 three and six months ending June 30, 2013:

	Unrealized holding gains
	on available-for-sale  Securities (net)
	Three months ended June 30, 2013			Six months ended June 30, 2013
	(dollars in thousands)
Beginning Balance	$	1,396		$	1,487
Other comprehensive income (loss) before reclassifications, net of $844,000 and $886,000 tax effect, respectively		(1,569	)		(1,651	)
Amounts reclassified from accumulated other Comprehensive income, net of $5,000 tax effect		—			(9	)
Net current-period other comprehensive loss		(1,569	)		(1,660	)
Ending Balance	$	(173	)	$	(173	)

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Note 3 - Noncontrolling Interest

During the third quarter of 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 will qualify as Tier 1 capital at each bank and will pay dividends at a rate of 5.30%. The preferred stock has no voting rights. The sale ended on December 31, 2012 with Stanly raising $4.5 million, Anson raising $1.5 million and Cabarrus raising $1.9 million in new capital less total 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. The total net amount is $7.7 million at the subsidiary bank level, consolidates up to the Company and 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.

Note 4 - 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. For the three and six months ended June 30, 2013, the Company’s 92,491 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. The Company had 122,341 stock options outstanding for the three and six months ended June 30, 2012, and they did not have a dilutive effect.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income 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:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Weighted average number of common shares outstanding		7,478,104			7,568,978			7,478,104			7,568,978
Effect of ESOP shares		(190,442	)		(137,009	)		(181,056	)		(133,925	)
Adjusted weighted average number of common shares used in computing basic net income per common share		7,287,662			7,431,969			7,297,048			7,435,053
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		7,287,662			7,431,969			7,297,048			7,435,053

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Note 5 - Investment Securities

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

June 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	23,564	$	561	$	227	$	23,898
U.S. Government agencies		46,542		278		1,118		45,702
GSE - Mortgage-backed securities and CMO’s		43,358		280		463		43,175
State and political subdivisions		7,370		426		—		7,796
Total securities available for sale	$	120,834	$	1,545	$	1,808	$	120,571

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. Treasury	$	18,731	$	846	$	1	$	19,576
U.S. Government agencies		21,689		485		—		22,174
GSE - Mortgage-backed securities and CMO’s		40,766		379		123		41,022
State and political subdivisions		8,165		701		—		8,866
Total securities available for sale	$	89,351	$	2,411	$	124	$	91,638

At both June 30, 2013 and December 31, 2012, the Company owned Federal Reserve stock reported at cost of $837,000 and $803,000, respectively that is included in other assets. Also at June 30, 2013 and December 31, 2012, the Company owned Federal Home Loan Bank Stock (FHLB) of $837,000 and $1.5 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2013.

Results from sales of securities available for sale for the three and six month period ended June 30, 2013 and June 30, 2012 are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013		2012
	(dollars in thousands)
Gross proceeds from sales	$	—	$	9,003		$	426	$	9,003
Realized gains from sales	$	—	$	128		$	14	$	128
Realized losses from sales		—		(112	)		—		(112	)
Net Realized gains	$	—	$	16		$	14	$	16

At June 30, 2013 and December 31, 2012 securities available for sale with a carrying amount of $50.1 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 June 30, 2013 and December 31, 2012. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At June 30, 2013, the unrealized losses related to two United States Treasury notes, nine government agency bonds and eleven

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mortgage backed securities. At December 31, 2012, the unrealized losses related to one United States Treasury note and seven mortgage backed securities.

	Less than 12 Months				12 Months or More				Total
June 30, 2013			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	7,184	$	227	$	—	$	—	$	7,184	$	227
U.S. Gov’t agencies		35,396		1,118		—		—		35,396		1,118
Mortgage-backed securities and CMO’s		24,763		463		—		—		24,763		463
State and political subdivisions		—		—		—		—		—		—
	$	67,343	$	1,808	$	—	$	—	$	67,343	$	1,808

	Less than 12 Months				12 Months or More				Total
December 31, 2012			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	2,485	$	1	$	—	$	—	$	2,485	$	1
U.S. Gov’t agencies		—		—		—		—		—		—
Mortgage-backed securities and CMO’s		21,355		123		—		—		21,355		123
State and political subdivisions		—		—		—		—		—		—
	$	23,840	$	124	$	—	$	—	$	23,840	$	124

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 losses, 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 the Company has 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. At June 30, 2013, the Company had no intent to sell and not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery

-11-

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2013 by remaining contractual maturity are as follows:

	June 30, 2013
	Amortized Cost		Estimated Fair Value
Securities available for sale
U. S. Treasury
Due after one but within five years		16,152		16,714
Due after five but within ten years		7,412		7,184
		23,564		23,898
U.S. Government agencies
Due within twelve months		5,003		5,076
Due after one but within five years		24,491		24,304
Due after five but within ten years		17,048		16,322
		46,542		45,702
Mortgage-backed securities
Due after one but within five years		2,737		2,643
Due after five but within ten years		5,559		5,700
Due after ten years		35,062		34,832
		43,358		43,175
State and political subdivisions
Due within twelve months		482		492
Due after one but within five years		1,131		1,220
Due after five but within ten years		4,739		5,011
Due after ten years		1,018		1,073
		7,370		7,796
Total Securities available for sale
Due within twelve months		5,485		5,568
Due after one but within five years		44,511		44,881
Due after five but within ten years		34,758		34,217
Due after ten years		36,080		35,905
	$	120,834	$	120,571

Note 6 - Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013			December 31, 2012
	(dollars in thousands)
Commercial
Commercial	$	48,335		$	41,390
Real estate - commercial		100,712			103,304
Other real estate construction loans		21,022			25,052
Noncommercial
Real estate 1-4 family construction		3,130			3,080
Real estate - residential		90,716			93,927
Home equity		47,454			48,517
Consumer loans		9,662			12,986
Other loans		705			822
		321,736			329,078
Less:
Allowance for loan losses		(5,481	)		(6,801	)
Deferred loan (fees) costs, net		57			105
Loans held for investment, net	$	316,312		$	322,382

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Note 7 - Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and six months periods ended June 30, 2013 and 2012, respectively:

Commercial	Three Months Ended June  30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(dollars in thousands)
Balance, beginning of period	$	2,257		$	2,823		$	2,791		$	2,904
Provision (recovery) charged to operations		22			(138	)		254			52
Charge-offs		(124	)		(42	)		(395	)		(354	)
Recoveries		34			7			39			48
Net (charge-offs)		(90	)		(35	)		(356	)		(306	)
Balance at end of period	$	2,689		$	2,650		$	2,689		$	2,650

Non-Commercial	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(dollars in thousands)
Balance, beginning of period	$	3,716		$	3,951		$	4,010		$	3,911
Provision (recovery) charged to operations		(927	)		501			(1,028	)		651
Charge-offs		(41	)		(49	)		(265	)		(171	)
Recoveries		44			16			75			28
Net (charge-offs)		3			(33	)		(190	)		(143	)
Balance at end of period	$	2,792		$	4,419		$	2,792		$	4,419

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2013 and December 31, 2012:

June 30, 2013
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	1,554	$	11,256	$	1,135	$	158,813	$	2,689	$	170,069
Non-Commercial		1,636		9,964		1,156		141,760		2,792		151,724
Total	$	3,190	$	21,220	$	2,291	$	300,573	$	5,481	$	321,793

December 31, 2012
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	1,428	$	14,979	$	1,363	$	154,767	$	2,791	$	169,746
Non-Commercial		1,606		11,128		2,404		148,309		4,010		159,437
Total	$	3,034	$	26,107	$	3,767	$	303,076	$	6,801	$	329,183

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

June 30, 2013

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	10	$	438	$	448	$	47,887	$	48,335	$	—
Real estate - commercial		401		3,279		3,680		97,032		100,712		—
Other real estate construction		3		1,581		1,584		19,438		21,022		—
Real estate 1-4 family construction		111		—		111		3,019		3,130		—
Real estate - residential		886		1,634		2,520		88,253		90,773		—
Home equity		30		531		561		46,893		47,454		—
Consumer loans		101		—		101		9,561		9,662		—
Other loans		—		—		—		705		705		—
Total	$	1,542	$	7,463	$	9,005	$	312,788	$	321,793	$	—

December 31, 2012

	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	98	$	437	$	535	$	40,855	$	41,390	$	—
Real estate - commercial		708		3,032		3,740		99,564		103,304		—
Other real estate construction		12		2,945		2,957		22,095		25,052		—
Real estate construction		—		—		—		3,080		3,080		—
Real estate - residential		1,309		2,507		3,816		90,216		94,032		—
Home equity		162		558		720		47,797		48,517		—
Consumer loan		218		1		219		12,767		12,986		—
Other loans		—		—		—		822		822		—
Total	$	2,507	$	9,480	$	11,987	$	317,196	$	329,183	$	—

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

The composition of nonaccrual loans by class as of June 30, 2013 and December 31, 2012 is as follows:

	June 30, 2013		December 31, 2012
	(dollars in thousands)
Commercial	$	438	$	437
Real estate - commercial		3,279		3,032
Other real estate construction		1,581		2,945
Real estate 1 - 4 family construction		—		—
Real estate - residential		1,634		2,507
Home equity		531		558
Consumer loans		—		1
Other loans		—		—
	$	7,463	$	9,480

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

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credit administration. The program has eight risk grades summarized in five categories as follows:

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at June 30, 2013 and December 31 2012:

June 30, 2013

	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	47,105	$	565	$	665	$	—	$	48,335
Real estate - commercial		84,186		9,136		7,390		—		100,712
Other real estate construction		18,053		803		2,166		—		21,022
Real estate 1 - 4 family construction		3,130		—		—		—		3,130
Real estate - residential		73,095		12,692		4,986		—		90,773
Home equity		45,283		1,202		969		—		47,454
Consumer loans		9,141		453		68		—		9,662
Other loans		705		—		—		—		705
Total	$	280,698	$	24,851	$	16,244	$	—	$	321,793

December 31, 2012

	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	39,800	$	836	$	754	$	—	$	41,390
Real estate - commercial		84,748		9,337		9,219		—		103,304
Other real estate construction		20,684		577		3,477		314		25,052
Real estate 1 - 4 family construction		3,080		—		—		—		3,080
Real estate - residential		78,114		9,728		6,189		—		94,031
Home equity		46,591		914		1,013		—		48,518
Consumer loans		12,360		512		114		—		12,986
Other loans		822		—		—		—		822
Total	$	286,199	$	21,904	$	20,766	$	314	$	329,183

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2013 and December 31, 2012:

-15-

June 30, 2013

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	47,897	$	438	$	48,335
Real estate - commercial		97,433		3,279		100,712
Other real estate construction		19,441		1,581		21,022
Real estate 1 - 4 family construction		3,130		—		3,130
Real estate - residential		89,139		1,634		90,773
Home equity		46,923		531		47,454
Consumer loans		9,662		—		9,662
Other loans		705		—		705
Total	$	314,330	$	7,463	$	321,793

December 31, 2012

	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	40,953	$	437	$	41,390
Real estate - commercial		100,272		3,032		103,304
Other real estate construction		22,107		2,945		25,052
Real estate 1 - 4 family construction		3,080		—		3,080
Real estate - residential		91,524		2,507		94,031
Home equity		47,960		558		48,518
Consumer loans		12,985		1		12,986
Other loans		822		—		822
Total	$	319,703	$	9,480	$	329,183

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation 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 at June 30, 2013 and December 31, 2012:

June 30, 2013

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Recorded Investment Accruing Loans 90 or More Days Past Due		Recorded Investment Loans in Non-accrual
	(dollars in thousands)
Commercial	$	1,442	$	196	$	1,127	$	732	$	—	$	438
Real estate - commercial		9,859		4,472		3,324		477		—		3,279
Other real estate construction		2,186		372		1,764		345		—		1,581
Real estate 1 - 4 family construction		377		28		349		16		—		—
Real estate - residential		8,375		3,661		4,714		1,119		—		1,634
Home equity		1,062		319		743		435		—		531
Consumer loans		150		20		130		66		—		—
Other loans		1		1		—		—		—		—
Total	$	23,452	$	9,069	$	12,151	$	3,190	$	—	$	7,463

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December 31, 2012

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Recorded Investment Accruing Loans 90 or More Days Past Due		Recorded Investment Loans in Non-accrual
	(dollars in thousands)
Commercial	$	1,977	$	388	$	1,470	$	616	$	—	$	437
Real estate - commercial		11,299		6,341		2,895		411		—		3,032
Other real estate construction		3,935		2,437		1,448		401		—		2,945
Real estate 1 - 4 family construction		840		713		127		127		—		—
Real estate - residential		8,985		3,994		4,991		1,215		—		2,507
Home equity		1,068		521		547		159		—		558
Consumer loans		235		39		196		105		—		1
Other loans		—		—		—		—		—		—
Total	$	28,339	$	14,433	$	11,674	$	3,034	$	—	$	9,480

	Three Months ended				Three Months ended
	June 30, 2013				June 30, 2012
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)
Commercial	$	1,237	$	4	$	1,401	$	13
Real estate - commercial		8,516		63		12,575		155
Other real estate construction		3,011		7		4,087		73
Real estate 1 - 4 family construction		609		6		1,326		10
Real estate - residential		8,680		132		12,043		174
Home equity		1,065		8		1,163		14
Consumer loans		192		1		334		6
Other loans		—		—		—		—
Total	$	23,310	$	221	$	32,929	$	445

	Six Months ended				Six Months ended
	June 30, 2013				June 30, 2012
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)
Commercial	$	1,444	$	15	$	1,551	$	27
Real estate - commercial		8,366		138		12,668		340
Other real estate construction		2,722		13		4,093		125
Real estate 1 - 4 family construction		537		11		1,202		16
Real estate - residential		8,662		221		12,270		311
Home equity		1,058		13		1,128		24
Consumer loans		308		4		299		10
Other loans		—		—		—		—
Total	$	23,097	$	415	$	33,211	$	853

Note 8 - 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

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“other” category are TDR’s with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

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

For the three and six months ended June 30, 2013 and 2012 the following tables present a breakdown of the types of concessions made by loan class:

	Three months ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding  Recorded Investment
	(dollars in thousands)
Other:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		2		403		403
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
Total		2	$	403	$	403

	Three months ended June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
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		—	$	—	$	—

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	Six months ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding  Recorded Investment
	(dollars in thousands)
Other:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		4		468		466
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—
Total		4	$	468	$	466

	Six months ended June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Other:
Commercial		1	$	10	$	9
Real estate - commercial		2		619		616
Other real estate construction		—		—		—
Real estate 1 - 4 family construction		—		—		—
Real estate - residential		1		24		24
Home equity		—		—		—
Consumer loans		1		52		48
Other loans		—		—		—
Total		5	$	705	$	697

The following tables’ present loans that were modified as troubled debt restructurings within the previous twelve months ending June 30, 2013 and 2012 for which there was a payment default:

	Twelve months ended June 30, 2013
	Number of Loans		Recorded Investment
	(dollars in thousands)
Other:
Commercial		—	$	—
Real estate - commercial		—		—
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		—		—
Home Equity loans		2		28
Consumer loans		—		—
Other loans		—		—
		2	$	28
Total		2	$	28

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	Twelve months ended June 30, 2012
	Number of Loans		Recorded Investment
	(dollars in thousands)
Other:
Commercial		1	$	9
Real estate - commercial		3		709
Other real estate construction		—		—
Real estate 1 - 4 family construction		—		—
Real estate - residential		3		367
Home Equity loans		—		—
Consumer loans		1		4
Other loans		—		—
		8	$	1,089
Total		8	$	1,089

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans and has $614,000 in allowance for loan loss as of June 30, 2013, as a direct result of these TDR’s.

The following tables present the successes and failures of the types of modifications within the previous twelve months ending June 30, 2013 and 2012:

June 30, 2013

	Paid In Full				Paying as restructured					Converted to nonaccrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments			Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
Below market interest rate		—	$	—		—	$	—			—	$	—		—	$	—
Extended payment terms		—		—		—		—	��		—		—		—		—
Forgiveness of Principal		—		—		—		—			—		—		—		—
Other Loans		—		—		15		1,246			—		—		—		—
Total		—	$	—		15	$	1,246			—	$	—		—	$	—

June 30, 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)
Below market interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Other Loans		—		—		10		968		1		206		—		—
Total		—	$	—		10	$	968		1	$	206		—	$	—

The Company has not committed to fund any additional disbursements for TDR’s.

Note 9 - 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.

-20-

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, 2013, outstanding financial instruments whose contract amounts represent credit risk were approximately:

(dollars in thousands)
Commitments to extend credit	$	64,472
Credit card commitments		8,182
Standby letters of credit		1,175
Total commitments	$	73,829

Note 10 - Fair Value Disclosures

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.

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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 and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At June 30, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an 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 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.

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

	June 30, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	23,898	$	23,898	$	—	$	—
US Government Agencies		45,702		—		45,702		—
GSE - Mortgage-backed securities and CMO’s		43,175		—		43,175		—
State and political subdivisions		7,796		—		7,796		—
Total assets at fair value	$	120,571	$	23,898	$	96,673	$	—
Total liabilities at fair value	$	—	$	—	$	—	$	—

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	December 31, 2012
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	19,576	$	19,576	$	—	$	—
US Gov’t Agencies		22,174		—		22,174		—
GSE - Mortgage-backed securities and CMO’s		41,022		—		41,022		—
State and political subdivisions		8,866		—		8,866		—
Total assets at fair value	$	91,638	$	19,576	$	72,062	$	—
Total liabilities at fair value	$	—	$	—	$	—	$	—

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. GAAP. 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 June 30, 2013 and December 31, 2012:

	June 30, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	8,961	$	—	$	—	$	8,961
Loans held for sale		676		—		676		—
Other real estate owned		5,626		—		—		5,626
Total assets at fair value	$	15,263	$	—	$	676	$	14,587
Total liabilities at fair value	$	—	$	—	$	—	$	—

	December 31, 2012
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	8,640	$	—	$	—	$	8,640
Loans held for sale		5,373		—		5,373		—
Other real estate owned		5,596		—		—		5,596
Total assets at fair value	$	19,609	$	—	$	5,373	$	14,236
Total liabilities at fair value	$	—	$	—	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements

	Valuation Technique	Unobservable Input	General Range
Nonrecurring measurements:
OREO	Discounted appraisals	Collateral discounts and Estimated costs to sell		0 - 10	%
Impaired loans	Discounted appraisals	Collateral discounts and Estimated costs to sell		0 - 30	%

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Note 11 - 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 June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012:

June 30, 2013

	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	47,130	$	47,130	$	47,130	$	—	$	—
Securities available for sale		120,571		95,960		23,898		96,673		—
Loans held for investment, net		316,312		324,185		—		—		324,185
Loans held for sale		676		676		—		676		—
Restricted stock		1,824		1,824		1,824		—		—
Bank-owned life insurance		6,456		6,456		—		—		6,456
Mortgage servicing rights		2,489		2,520		—		—		2,520
Accrued interest receivable		1,840		1,840		—		—		1,840
FINANCIAL LIABILITIES
Deposits	$	460,967	$	446,203	$	—	$	—	$	446,203
Short-term borrowings		9,372		9,372		—		9,372		—
Long-term borrowings		41		41		—		41		—
Junior subordinated debt		11,127		11,262		—		—		11,262
Accrued interest payable		232		232		—		—		232

December 31, 2012

	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	81,728	$	81,728	$	81,728	$	—	$	—
Securities available for sale		91,638		91,638		19,576		72,062		—
Loans held for investment, net		322,382		331,386		—		—		331,386
Loans held for sale		5,373		5,373		—		5,373		—
Restricted stock		2,265		2,265		2,265		—		—
Bank-owned life insurance		6,394		6,394		—		—		6,394
Mortgage servicing rights		2,394		2,394		—		—		2,394
Accrued interest receivable		1,753		1,753		—		—		1,753
FINANCIAL LIABILITIES
Deposits	$	457,612	$	446,669	$	—	$	—	$	446,669
Short-term borrowings		18,690		18,690		—		18,690		—
Long-term borrowings		1,546		1,702		—		1,702		—
Junior subordinated debt		11,127		11,268		—		—		11,268
Accrued interest payable		270		270		—		—		270

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

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• 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 10.

• 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.

• Mortgage serving rights – Fair value is determined based upon discounted cash flows using market-based assumptions 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.

• 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 June 30, 2013, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 - Recent Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02, an update to ASC 220 “Comprehensive Income”. The amendments in this update do not change the current reporting requirements for net income or other comprehensive income (OCI), but finalize reporting requirements related to reclassifications out of accumulated other comprehensive income (AOCI). Presentation requirements were originally addressed in ASU 2011-05, but delayed by ASU 2011-12 as a result of feedback received and have been modified in this Update to address those concerns. This Update requires entities to provide information about significant amounts reclassified out of AOCI. If the reclassified amount is required to be reclassified in its entirety to net income in the

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same reporting period, the entity is required to present, either on the face of the income statement or in the notes, the impact of the reclassification on the respective line items of net income. For other amounts that are reclassified partially to the balance sheet and partially to the income statement (i.e. those amounts that are not reclassified in their entirety to net income in the same reporting period), the entity must cross-reference to other disclosures that provide additional detail about those amounts. The update is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update did not have a significant impact on the Company’s financial statements except for the added disclosures.

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. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

Comparison of Financial Condition at June 30, 2013 and December 31, 2012.

During the six months ended June 30, 2013, the Company’s total assets decreased $15.3 million, from $545.0 million to $529.7 million. During the same period, cash and cash equivalents decreased $34.6 million and loans held for investment decreased $7.4 million, while, securities available for sale increased $28.9 million.

Cash and cash equivalents decreased $34.6 million, during the six months ended June 30, 2013. Cash and due from banks increased $1.4 million, while interest-earning deposits with banks decreased $36.0 million. The Company has continued to invest excess cash into securities to increase the yield.

Investment securities increased $28.9 million to $120.6 million for the six months ended June 30, 2013. During the first six months of 2013, the Company purchased securities of $40.8 million. The increase from new purchases was reduced by maturities and calls of $350,000, sales of $405,000 and normal reductions stemming from principal payments on mortgage backed securities. The Company is investing the funds generated from the pay downs in the loan portfolio and the increase in deposits, in lower duration securities as well as variable rate securities. These sectors should provide better protection from interest rate risk in a rising rate environment, mitigate the downside risk embedded in the current portfolio and improve the yield on earning assets. At June 30, 2013, the Company’s securities portfolio had net unrealized losses of $263,000.

Loans held for investment decreased from $329.2 million to $321.8 million, a decrease of $7.4 million. All areas of the loan portfolio decreased during the first six months of 2013 with the exception of commercial loans that grew by $6.9 million. Other real estate construction loans experienced the largest decline of $4.0 million during the period. The Company had one

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relationship that was foreclosed on for $1.3 million. The remainder of the decrease was related to payoffs and construction loans being converted to permanent loans. Loans held for sale decreased 87.4% or $4.7 million. The allowance for loan losses was $5.5 million, at June 30, 2013, which represented 1.7% of the loan portfolio compared to $6.8 million or 2.1% at December 31, 2012.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, prepaid assets, and other assets. Bank owned life insurance, accrued interest receivable and prepaid assets increased $62,000, $87,000 and $412,000, respectively. Premises and equipment declined $911,000. The decrease in premises and equipment was related to the sale of a piece of property that had been purchased for further use. The property was sold for $949,000, with the Company realizing a gain on the sale of $229,000. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $441,000. Federal Home Loan Bank 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 $34,000 to $837,000, while the required ownership in Federal Home Loan Bank decreased $475,000 to $987,000 during the first six months of 2013. Other real estate owned increased $741,000. The Company foreclosed on five loan relationships totaling $2.3 million during the first half of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company sold eleven pieces, or $783,000, of other real estate owned resulting in realized losses of $4,000. The Company recorded net valuation write-down adjustments of $758,000. The majority or $678,000 of the write-downs were attributed to one piece of property. Other assets increased $1.0 million primarily resulting from an increase in deferred tax assets due to the reduction in unrealized gains in the available for sale securities portfolio.

Customer deposits, our primary funding source, experienced a $3.4 million increase during the six months ended June 30, 2013, increasing from $457.6 million to $461.0 million. Demand noninterest bearing checking increased $3.9 million and interest checking and money market accounts increased $11.0 million, while savings deposits increased $3.6 million for the period. These increases were offset by declines in time deposits over $100,000 of $5.7 million and other time deposits of $9.4 million.

Total borrowings decreased $10.8 million for the period and consist of both short-term and long-term borrowed funds, primarily from the Federal Home Loan Bank. The maturity of $10.5 million in Federal Home Loan Bank advances played a major part in the decrease. At June 30, 2013, $3.5 million of the total borrowings of $20.5 million were comprised of Federal Home Loan Bank advances. Other components of total borrowings include $11.1 million in junior subordinated debt and $5.9 million master notes and other secured borrowings.

Other liabilities decreased from $11.4 million at December 31, 2012 to $4.8 million at June 30, 2013, a decrease of $6.6 million. At December 31, 2012, the Company had a combined total of $7.9 million being held in escrow related to the Company’s subsidiary banks preferred stock offering in the last half of 2012. This preferred stock was issued in the first quarter of 2013.

The Company has 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 historically trades its stock on the 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 requested to buy back. During the second quarter

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of 2013, the Company reclassed an additional $102,000 to this liability from additional paid-in capital.

At June 30, 2013, total shareholders’ equity was $41.4 million, a decrease of $1.3 million from December 31, 2012. Net income for the period was $919,000. Unrealized gains and losses on investment securities net of tax decreased $1.7 million. The Company also recorded $176,000 in dividends on its series A and B preferred stock for the six month period ended June 30, 2013. The Company also has $206,000 in dividends attributed to noncontrolling interest. The Company repurchased at par, $7.7 million of its series A preferred stock that was issued to the United States Treasury. The Company’s subsidiary banks issued $7.8 million of series B preferred stock that is presented less issuance costs, as noncontrolling interest. The Company, after receiving approval from the United States Department of the Treasury and the Federal Reserve, repurchased common stock totaling $72,000. At June 30, 2013, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations for the Three Months Ended June 30, 2013 and 2012.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $156,000 for the three months ended June 30, 2013, as compared to $401,000 for the three months ended June 30, 2012, a decrease of $245,000. Net income available to common shareholders was $(23,000) or $0.00 per common share for the three months ended June 30, 2013, compared at $240,000 or $0.03 per common share for the three months ended June 30, 2012. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 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 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 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 by levels of noninterest-bearing liabilities and capital.

Net interest income for the three months ended June 30, 2013 and June 30, 2012 was $4.2 million and $4.5 million, respectively, a decrease of $322,000. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $231,000. The average yield on our interest–earning assets decreased 60 basis points to 4.14%, while the average rate we paid for our interest-bearing liabilities decreased 23 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. The aforementioned decreases resulted in a decrease of 37 basis points in our interest rate spread, from 3.82% in 2012 to 3.45% in 2013. Our net interest margin was 3.56% and 3.95% for the comparable periods in 2013 and 2012, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended June 30, 2013 and 2012:

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Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,

(in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2013		2012		2013		2012		2013			2012
Interest-earning assets:
Taxable securities	$	106,051	$	73,361	$	302	$	345		1.14	%		1.89	%
Nontaxable securities (1)		7,407		9,665		62		88		5.46	%		5.97	%
Short-term investments		45,596		36,245		54		40		0.48	%		0.44	%
Taxable loans		308,081		338,383		4,343		4,832		5.65	%		5.74	%
Non-taxable loans (1)		14,243		12,363		106		109		4.84	%		5.74	%
Total interest-earning assets		481,378		470,017		4,867		5,414		4.14	%		4.74	%
Interest-bearing liabilities:
Interest-bearing deposits		384,847		368,782		489		643		0.51	%		0.70	%
Short-term borrowed funds		11,351		16,369		43		81		1.52	%		1.99	%
Long-term debt		11,750		17,417		166		199		5.67	%		4.60	%
Total interest bearing liabilities		407,948		402,568		698		923		0.69	%		0.92	%
Net interest spread	$	73,430	$	67,449	$	4,169	$	4,491		3.45	%		3.82	%
Net interest margin (1) (% of earning assets)										3.56	%		3.95	%

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

Provision and Allowance for Loan Losses

The Company recovered $(405,000) for the three months ending June 30, 2013 compared to adding $363,000 of additional provision for the same period in 2012. There were net loan charge-offs of $87,000 for the three months ended June 30, 2013, as compared with net loan charge-offs of $68,000 during the same period of 2012. Refer to the Asset Quality discussion on page 32 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance in our long term success. Total noninterest income decreased $161,000 for the three month period ending June 30, 2013 as compared to the same period in 2012. Income from mortgage loan sales decreased $25,000 from $667,000 for the quarter ended June 30, 2012 to $642,000 for the same period in 2013. Service charges on deposit accounts produced revenue of $392,000, a decrease of $44,000 for the three months ended June 30, 2013. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $20,000 or 2.3% decrease for the comparable three month period, primarily due to a decrease in brokerage commissions and asset management fees. The Company realized losses on the sale of other real estate owned of $22,000 for the three months ended June 30, 2013 compared to realized gains of $25,000 for the same period in 2012.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2013 was $6.3 million compared to $5.6 million for the same period of 2012, an increase of $664,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $97,000 for the quarter ending June 30, 2013. Foreclosed real estate expense increased $606,000 for the three months ending June 30, 2013. The major factor related to the increase in foreclosed real estate expense was

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write-downs on properties held in other real estate owned. These write downs are attributed to updated appraisals and the lowering of list prices. Total write-downs for the three month period in 2013 were $758,000 compared to $176,000 for the same period in 2012. Professional fees and services increased $116,000 during the three months ending June 30, 2013 as compared to $127,000 for the same period in 2012. The variance in professional fees and services was directly related to reimbursement of prior period legal fees totaling $93,000 during the second quarter of 2012 that reduced professional fees and services for the three months ended June 30, 2012 and was related to a reimbursement for legal services under the Company’s director and officer liability insurance policy. During the second quarter of 2013, the Company did receive the final reimbursement of prior period legal fees totaling $40,000. Other noninterest expense increased $83,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

Other noninterest expense

	Three Months Ended June 30,
	2013		2012
	(in thousands)
Postage	$	57	$	47
Telephone and data lines		38		38
Loan collection expense		109		55
Shareholder relations expense		45		24
Dues and subscriptions		43		40
Other		326		331
Total	$	618	$	535

Income Tax Expense

The Company had income tax expense of $156,000 for the three months ended June 30, 2013 resulting in an effective rate of 37.60% compared to income tax expense of $228,000 and an effective rate of 36.25% in the 2012 period.

Comparison of Results of Operations For the Six Months Ended June 30, 2013 and 2012.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $919,000 for the six months ended June 30, 2013, as compared to $1.1 million for the six months ended June 30, 2012, a decrease of $182,000. Net income available to common shareholders was $476,000 or $0.07 per common share at June 30, 2013, compared to $778,000 or $0.10 per common share at June 30, 2012. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 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

Net interest income for the six months ended June 30, 2013 was $8.2 million as compared to $9.2 million during the six months ended June 30, 2012, resulting in a decrease of $966,000. During the six months ending June 30, 2013, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $545,000. The average yield on our interest-earning assets decreased 77 basis points to 4.07%, while the average rate we paid for our interest-bearing liabilities decreased 23 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in a decrease of 54 basis points in our interest rate spread to 3.34% for the first six months of 2013, compared to 3.89% for the first six months of 2012. Our

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net interest margin was 3.46% and 4.02% for the comparable six month periods in 2013 and 2012, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a strong interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2013 and 2012:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

(in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2013		2012		2013		2012		2013			2012
Interest-earning assets:
Taxable securities	$	102,213	$	73,474	$	574	$	681		1.13	%		1.86	%
Nontaxable securities (1)		7,629		9,841		128		179		5.51	%		5.97	%
Short-term investments		54,418		29,018		109		72		0.40	%		0.50	%
Taxable loans		311,158		345,738		8,667		9,927		5.62	%		5.77	%
Non-taxable loans (1)		14,437		12,577		209		221		4.75	%		5.76	%
Total interest-earning assets		489,855		470,648		9,687		11,080		4.07	%		4.84	%
Interest-bearing liabilities:
Interest-bearing deposits		386,513		366,574		1,034		1,325		0.54	%		0.73	%
Short-term borrowed funds		14,166		17,354		123		155		1.75	%		1.80	%
Long-term debt		12,209		20,606		337		441		5.57	%		4.30	%
Total interest bearing liabilities		412,888		404,534		1,494		1,921		0.73	%		0.95	%
Net interest spread	$	76,967	$	66,114	$	8,193	$	9,159		3.34	%		3.89	%
Net interest margin (1) (% of earning assets)										3.46	%		4.02	%

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

Provision and Allowance for Loan Losses

The Company recovered $(774,000) for the six months ending June 30, 2013 compared to adding $703,000 of additional provision for the same period in 2012. There were net loan charge-offs of $546,000 for the six months ended June 30, 2013 as compared with net loan charge-offs of $449,000 during the same period of 2012. Refer to the Asset Quality discussion on page 32 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 decreased $109,000 for the six month period ending June 30, 2013 as compared to the same period in 2012. Income from mortgage loan sales was $1.4 million for both the six months ended June 30, 2013 and 2012. Service charges on deposit accounts produced earnings of $797,000 for the six months ended June 30, 2013, a decrease of $71,000. The primary contributing factor is a decrease in NSF fees due in large part to changes in the regulatory governance. Other service fees and commissions experienced a 2.7% increase for the comparable six month period. This increase was directly related to brokerage commissions and asset management fees increasing. Gain on sale of other assets was $225,000 for the six months ended June 30, 2013 compared to $296,000 for the same period in 2012. The Company did realize a gain on the aforementioned sale of a piece of property being held in premises and equipment in the amount of $229,000 in the first quarter of

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2013 and during the first quarter of 2012 the Company realized a gain on the sale of a government guaranteed loan of $276,000. Gains realized on the sale of securities were $14,000 for the six months in 2013 compared to $16,000 for the same period in 2012.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2013 was $11.9 million compared to $11.4 million for the same period of 2012; an increase of $527,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $111,000 to $6.2 million for the period ending June 30, 2013. Net occupancy and equipment expense had a combined decrease of $37,000. Professional fees and services increased $309,000. Foreclosed real estate expense increased $313,000. The major factor related to the increase in foreclosed real estate expense was 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 first six months of 2013 totaling $758,000 compared to $527,000 in write downs for the same period in 2012. The increase in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000 during the first six months of 2012. Of this 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 previous closed government guaranteed loan. The Company did receive final reimbursement totaling $40,000 of prior period legal fees. Other noninterest expense increased $131,000 for the comparable six month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

	Six Months Ended June 30,
	2013		2012
	(in thousands)
Postage	$	104	$	104
Telephone and data lines		92		89
Loan collection expense		194		144
Shareholder relations expense		87		78
Dues and subscriptions		83		89
Other		767		692
Total	$	1,327	$	1,196

Income Tax Expense

The Company had income tax expense of $509,000 for the six months ended June 30, 2013 resulting in an effective tax rate of 35.64%, compared to income tax expense of $452,000 and an effective rate of 29.10% in the 2012 period.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and by recoveries of amounts previously charged off and is reduced by loans charged off. Management continuously evaluates the adequacy of the allowance for loan 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

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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 future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because 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 recovery of loan losses was $(774,000) for the six months ended June 30, 2013 as compared to provision of $703,000 for the same period in 2012. At June 30, 2013 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $21.2 million compared to $26.1 million at December 31, 2012, a decrease of $4.9 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $9.5 million at December 31, 2012 to $7.5 million at June 30, 2013. The Company foreclosed on and transferred two loan relationships totaling $2.0 million into other real estate owned during the first quarter. This was the major factor behind the decrease in nonaccrual loans during the quarter. The Company had net loan charge-offs for the first six months of 2013 of $546,000 compared to net loan charge-offs of $449,000 for the same period in 2012.

The allowance expressed as a percentage of gross loans held for investment decreased 37 basis points from 2.07% at December 31, 2012 to 1.70% at June 30, 2013. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.24% at December 31, 2012 and 0.76% at June 30, 2013, while the individually evaluated allowance as a percentage of individually evaluated loans increased from 11.62% to 15.11%. While the amount of impaired loans declined due to the related transfer of foreclosed loans to other real estate owned, these loans while impaired only had minimal specific reserve dollars. The larger decline in impaired loan balances compared to the lower decline in specific loan reserves was behind the increase in the individually evaluated percentage. 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 components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple macro-economic factors make up the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations. During the fourth quarter of 2012, the

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Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio. The probabilities of default that the Company acquires from a third party vendor are associated with a two year horizon, while the allowance for loan loss is deemed to have a one year horizon. Therefore, the Company altered the model to account for this horizon; converting the two year probability of default into a one year probability of default for each obligor. At this time, the Company also updated the data inputs into the model; specifically the OLS regression coefficient and the probability of defaults obtained from the vendor. The net result of these alterations had minimal effect on the loan loss provision. During the first quarter of 2013 the Company updated the beacon scores that are one of the components used within the allowance model. Beacon scores are updated semi-annually. For the first time in several updates, beacon scores experienced significant improvement. This improvement coupled with a continued decline in loans relating to pay downs were the major factors behind the decrease in general reserves. During the second quarter of 2013, the Company updated the probability of default statistics that are used in the model. These statistics are updated periodically and like the beacon scores in the first quarter experienced significant improvement. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 2.88% at December 31, 2012, to 2.32% at June 30, 2013. Loans past due 30 to 89 days decreased $965,000, from $2.5 million at December 31, 2012 to $1.5 million at June 30, 2013. 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 June 30, 2013 totaled $6.1 million compared to $6.8 million at December 31, 2012, and included in impaired loans.

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The following nonperforming loan table shows the comparison of June 30, 2013 to December 31, 2012:

Nonperforming Assets

(dollars in thousands)

	June 30, 2013			December 31, 2012
Nonperforming assets:
Loans past due 90 days or more	$	—		$	—
Nonaccrual loans		7,463			9,480
Other real estate owned		9,454			8,713
Total nonperforming assets	$	16,917		$	18,193
Allowance for loans losses	$	5,481		$	6,801
Nonperforming loans to total loans		2.32	%		2.88	%
Allowance for loan losses to total loans		1.70	%		2.07	%
Nonperforming assets to total assets		3.19	%		3.34	%
Allowance for loan losses to nonperforming loans		73.45	%		71.74	%

During the first six months of 2013, the Company had a net increase of $741,000 in other real estate owned. The Company foreclosed on four loan relationships during first quarter of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company sold eleven pieces, or $783,000, of other real estate owned resulting in realized losses of $4,000. The Company recorded net valuation write-down adjustments of $758,000.

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 $23.8 million at June 30, 2013, with available credit of $23.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $52.6 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $33.2 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $20.5 million at June 30, 2013, compared to $31.4 million at December 31, 2012.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve, the primary federal regulator of the Company and its subsidiary banks, has 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 1 leverage ratio of 4 percent. Banks are considered “well capitalized” by regulatory standards when they meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risk-based capital ratio of 10 percent and a leverage ratio of 5 percent. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. As previously discussed, each of the Company’s subsidiary banks had a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B that was issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and will pay dividends at a rate of 5.30%. Stanly raised $4.5 million, Anson raised $1.5 million and Cabarrus raised $1.9 million in new capital less total issuance costs of $113,000. The net total of $7.7 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At June 30, 2013, the Company had $11.1 million in subordinated debt outstanding and $2.7 million remaining in preferred stock issued to the United States Department of the Treasury after the repayment of $7.7 million to the United States Treasury. The Company has made all interest and dividend payments in a timely manner.

During the second quarter of 2013, the Company’s subsidiary, Bank of Stanly began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The proceeds of this campaign will be used to repay the remaining $2.7 million in preferred stock issued to the United States Department of the Treasury.

Accounting and Regulatory Matters

On July 2, 2013, the Federal Reserve and the Office of the Comptroller of the Currency adopted a final rule that will revise the current risk-based and leverage capital requirements for banking organizations. The final rule is a continuation of joint notices of proposed rulemaking originally published in the Federal Register during August, 2012.

The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, and a higher overall minimum tier 1 capital requirement, incorporating these new requirements into the existing prompt corrective action (PCA) framework. It also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. This additional capital is referred to as the “capital conservation buffer”. The “countercyclical capital buffer” provisions from the proposed rule have also been adopted, however, they apply only to large financial institutions (banks and bank holding companies with total consolidated assets of $250 billion or more) implementing the “advanced approaches” framework and are not applicable to the Company or its subsidiary banks.

The final rule permanently grandfathers the tier 1 capital treatment for certain non-qualifying capital instruments, including trust preferred securities, outstanding as of May 19, 2010.

Under the proposed rules released last August, banking organizations would have been required to recognize in regulatory capital all components of accumulated other comprehensive income (excluding accumulated net gains and losses on cash-flow hedges that relate to the hedging of items that are not recognized at fair value on the balance sheet). The final rule carries this requirement forward, with an exception for smaller banking organizations, such as the Company, which are not subject to the “advanced approaches” rule. Such organizations

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may make a one-time election not to include most elements of accumulated other comprehensive income (including unrealized gains and losses on securities designated as available-for-sale) in regulatory capital under the final rule. Organizations making this election will be permitted to use the currently existing treatment under the general risk-based capital rules that exclude most accumulated other comprehensive income elements from regulatory capital. The election must be made with the first call report or FR Y-9 report filed after the banking organization becomes subject to the final rule (January 2015 in the Company’s case).

The new rule also amends the existing methodologies for determining risk-weighted assets for all banking organizations. Specifically, the final rule assigns a 50% or 100% risk weight to mortgage loans secured by one-to-four family residential properties. Generally, residential mortgage loans secured by a first lien on a one- to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weight. All other one-to-four family residential mortgage loans, including loans secured by a junior lien on residential property, are assigned a 100% risk weight.

The mandatory compliance date for the Company and its subsidiary banks will be January 1, 2015, with a transition period for the capital conservation buffer until January 1, 2016, and additional transition periods for certain other measures under the new rule.

Management will continue to evaluate the potential effect of the new final rule over the coming quarters. As of the date of this report, management is not aware of any other 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 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. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2012.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal 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 (“Exchange Act”) Rule 13a-15.

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, 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 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

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Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d - 15(f) of the Exchange Act) during the second quarter of 2013. In connection with such evaluation, the Company has determined that 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 ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings. From time to time, the Banks are engaged in ordinary routine litigation incidental to their business.

Item 1A. Risk Factors

Disclosure under this item is not required for smaller reporting companies.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2013.

	(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)(3)
April 1, 2013 Through April 30, 2013		—	$	—		—	$	—
May 1, 2013 Through May 31, 2013		6,667	$	3.00		—	$	—
June 1, 2013 Through June 30, 2013		—	$	—		—	$	—
Total		6,667	$	3.00		—	$	—

(1) Trades of the Company’s stock occur in the Over-the-Counter market 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.

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

(2) On June 26, 2012 the Board of Directors of Uwharrie Capital Corp, after receiving approval from the United States Department of Treasury and the Federal Reserve Bank, its primary regulator, approved the repurchase of up to $400,000 of outstanding common stock. On June 27, 2012, 24,951 shares were repurchased for $68,615. On August 16, 2012, 6,250 shares were repurchased for $20,000. On September 29, 2012, 38,653 shares were repurchased for $154,612. On December 20, 2012, 20,406 shares were repurchased for $61,218. On March 21, 2013, 7,273 shares were repurchased for $20,001. On March 27, 2013, 10,452 shares were repurchased for $32,041. On May 28, 2013, 6,667 shares were repurchased for $20,000. As of June 30, 2013, there was $23,513 for repurchase under the approved plan.

Item 3. Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number	Description of Exhibit
3.1	Registrant’s Articles of Incorporation(1)
3.2	Registrant’s By-laws(6)
3.2	Articles of Amendment dated December 19, 2008, regarding Series A and Series B Preferred Stock (5)
4	Form of stock certificate(1)
4.2	Form of certificate for the Series A Preferred stock(5)
4.3	Form of certificate for the Series B Preferred stock(5)
4.4	Warrant dated December 23, 2008, for purchase of share of Series B Preferred stock (5)
4.5	Form of Security Holders Agreement(9)
10.1	Incentive Stock Option Plan, as amended(1)
10.2	Employee Stock Ownership Plan and Trust(2)
10.3	2006 Incentive Stock Option Plan(3)
10.4	2006 Employee Stock Purchase Plan(3)
10.5	Amendment to the Employee Stock Ownership Plan and Trust (4)
10.6	Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury (5)
10.7	Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (7)
10.8	Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner (7)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith)

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31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith)
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, in XBRL (eXtensible Business Reporting Language)(8)
(1)	Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
(2)	Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
(3)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
(5)	Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.
(6)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(7)	Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(8)	Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(9)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

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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, thereunto duly authorized.

		UWHARRIE CAPITAL CORP
		(Registrant)
Date:	August 12, 2013	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer
Date:	August 12, 2013	By:	/s/ R. David Beaver, III
		R. David Beaver, III
		Principal Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
4.1	Registrant’s Articles of Incorporation(1)
3.2	Registrant’s By-laws(6)
3.2	Articles of Amendment dated December 19, 2008, regarding Series A and Series B Preferred Stock (5)
5	Form of stock certificate(1)
4.2	Form of certificate for the Series A Preferred stock(5)
4.3	Form of certificate for the Series B Preferred stock(5)
4.4	Warrant dated December 23, 2008, for purchase of share of Series B Preferred stock (5)
4.5	Form of Security Holders Agreement(9)
10.9	Incentive Stock Option Plan, as amended(1)
10.10	Employee Stock Ownership Plan and Trust(2)
10.11	2006 Incentive Stock Option Plan(3)
10.12	2006 Employee Stock Purchase Plan(3)
10.13	Amendment to the Employee Stock Ownership Plan and Trust (4)
10.14	Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury (5)
10.15	Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (7)
10.16	Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner (7)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith)
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, in XBRL (eXtensible Business Reporting Language)(8)
(1)	Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
(2)	Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
(3)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
(5)	Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.
(6)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(7)	Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(8)	Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(9)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

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