UWHARRIE CAPITAL CORP, S-2, 1998-08-07

UWHARRIE CAPITAL CORP
S-2, 1998-08-07
STATE COMMERCIAL BANKS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
UWHARRIE CAPITAL CORP
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
NORTH CAROLINA 56-1814206
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

167 NORTH SECOND STREET
POST OFFICE BOX 338
ALBEMARLE, NORTH CAROLINA 28002-0338
(704) 983-6181
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

ROGER L. DICK, PRESIDENT AND CHIEF EXECUTIVE OFFICER
UWHARRIE CAPITAL CORP
167 NORTH SECOND STREET
POST OFFICE BOX 338
ALBEMARLE, NORTH CAROLINA 28002-0338
(704) 983-6181
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

COPIES TO:
ANTHONY GAETA, JR., ESQ.
W. MARK GRIFFITH, ESQ.
MOORE & VAN ALLEN, PLLC
ONE HANNOVER SQUARE, SUITE 1700
RALEIGH, NORTH CAROLINA 27611
(919) 828-4481

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $1.25 par
value per share ...... 850,000 $ 5.75 $4,887,500 $ 1,441.81
</TABLE>

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(1) Estimated solely for the purpose of calculating the registration fee, based
upon the last known sale price as of August 3, 1998 (a date within five
business days prior to the filing date of this Registration Statement).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>

PROSPECTUS

Uwharrie Capital Corp

COMMON STOCK
PURCHASE PRICE $ PER SHARE

<TABLE>
<S> <C>
200,000 SHARES 850,000 SHARES
(MINIMUM) (MAXIMUM)
MINIMUM PURCHASE 200 SHARES MAXIMUM PURCHASE 25,000 SHARES
</TABLE>

Uwharrie Capital Corp (the "Company") hereby offers for sale a minimum of
200,000 and a maximum of 850,000 shares of the Company's common stock, par
value $1.25 per share (the "Common Stock") at a price of $ per share (the
"Offering"). The Common Stock is being offered pursuant to nontransferable
subscription rights to shareholders of the Company as of August 28, 1998 (the
"Record Date") ("Existing Shareholders") for the first 30 days of the Offering,
or until 5:00 p.m. Eastern Time on , 1998 (the "Shareholder Offering"). In
the event that Existing Shareholders subscribe for a number of shares in excess
of the total number of shares offered, subscriptions will be allocated on a pro
rata basis within the purchase limitations of this Offering. If shares remain
unsubscribed at the end of the Shareholder Offering, they will be offered at
the same price and with the same purchase limitations on a
first-come-first-serve basis to the following (the "Public Offering"): (i)
existing customers on the Record Date of the Bank of Stanly or any one of its
subsidiaries, The Strategic Alliance Corporation and BOS Agency, Inc.; (ii)
businesses in, residents of, or persons having property interests in Stanly,
Montgomery, Richmond, Anson, Union, Cabarrus, Rowan, Randolph, or Davidson
Counties, North Carolina (the nine county area of North Carolina known as the
"Uwharrie Lakes Region"); and (iii) other persons or businesses outside of the
Uwharrie Lakes Region subject to the approval of the Company's Board of
Directors.

It is the philosophy of the Company to encourage local ownership of the
Common Stock which is neither listed nor traded on any market. The Company
makes every reasonable effort to match willing buyers with willing sellers as
they become known for the purpose of private negotiations for the purchase and
sale of the Company's Common Stock. As of , 1998, the last known sale
price of the Common Stock was $ per share.

SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
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<TABLE>
<CAPTION>
PRICE TO PUBLIC PROCEEDS TO COMPANY (1)
--------------- -----------------------
<S> <C> <C>
Per Share ............. $ $
Total Minimum ......... $
Total Maximum ......... $ $
</TABLE>

The shares of Common Stock are offered by the Company, subject to prior
sale, receipt and acceptance by them and subject to the right of the Company to
reject any order in whole or in part and certain other conditions. It is
expected that certificates for such shares will be available for delivery
within ten business days following completion of the offering.

The date of this Prospectus is , 1998.
<PAGE>

UWHARRIE LAKES REGION

(MAP GOES HERE)

FOR YOUR CONVENIENCE, SUBSCRIPTION OFFER FORMS ARE CONTAINED AT THE BACK
OF THIS PROSPECTUS. SHOULD YOU DESIRE TO SUBSCRIBE FOR SHARES OF THE COMMON
STOCK OF UWHARRIE CAPITAL CORP, PLEASE COMPLETE ONE OF THE SUBSCRIPTION OFFER
FORMS AND RETURN IT TO:

UWHARRIE CAPITAL CORP
STOCK INFORMATION CENTER
167 NORTH SECOND STREET
ALBEMARLE, NORTH CAROLINA 28001-4803

SHOULD YOU NEED ASSISTANCE IN COMPLETING THE SUBSCRIPTION OFFER FORM OR
HAVE ANY OTHER QUESTIONS REGARDING THE PROSPECTUS, PLEASE CONTACT THE STOCK
INFORMATION CENTER AT (704) 983-6181.
<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS.

THE COMPANY

Uwharrie Capital Corp (the "Company") is a North Carolina bank holding
company with total consolidated assets of $154 million, total deposits of $128
million and total shareholders' equity of $13 million, each as of June 30,
1998. The Company was organized on July 1, 1993 to become the bank holding
company for the Bank of Stanly (the "Bank"), a North Carolina commercial bank
chartered on September 28, 1983, and its two wholly-owned subsidiaries, BOS
Agency, Inc. ("BOS Agency"), which provides insurance services, and The
Strategic Alliance Corporation ("Strategic Alliance"), which provides
broker-dealer investment services. The Bank, based on deposit statistics
collected for 1997 by the Federal Deposit Insurance Corporation ("FDIC"), held
over 17% of deposits of Stanly County residents insured by the FDIC, and had
banking relationships with over 45% of Stanly County households. The Company,
the Bank and its subsidiaries are located in Stanly County, their primary
service area, but intend to prudently expand their service area to include the
entire Uwharrie Lakes Region.

The Bank engages in retail and commercial banking, with three banking
offices in the City of Albemarle, one office in the Town of Norwood, and one
office in the Town of Oakboro. Through its five branch locations in Stanly
County, the Bank provides a wide range of banking services including deposit
accounts, commercial, consumer, home equity and residential mortgage loans,
safe deposit boxes and automated banking. Its depository services include
personal and commercial checking, savings, money market, certificates of
deposit accounts and individual retirement accounts tailored to meet customers'
needs. The Bank provides fixed and variable rate loans which include mortgage,
home equity lines of credit, consumer and commercial loans, and other lines of
credit for both consumer and commercial customers. The Bank also offers credit
card services, night depository, wire transfers, incoming and outgoing
collection items, notary service, check safekeeping and direct deposit.

The Bank has two wholly-owned subsidiaries, Strategic Alliance and BOS
Agency which provide investment management and insurance products for the
Bank's customers through the Bank's branch network. Strategic Alliance is a
broker-dealer and member of the National Association of Securities Dealers,
Inc. ("NASD") and offers a full range of financial and investment services to
its customers in the Uwharrie Lakes Region through its marketing division. BOS
Agency serves the risk management needs of customers and brings life insurance,
long-term health care, Medicare supplement and other insurance industry
products to customers' financial portfolios. The Bank also owns a 50% interest
in Corporate Data Services, Inc. ("CDS"), Asheboro, North Carolina, a North
Carolina corporation which provides operations and data processing services to
community banks.

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

Customers of the Bank have seen the impact of this strategy through its
new product lines. A new service offered by the Bank during 1997 was 24 Hour
Telephone Banking, providing customers convenience and access to account
information, rate information and accessibility of funds transfers between
accounts. Another service now offered is a Visa Check Card(R) which functions
as a point-of-sale (POS) debit card and automated teller machine (ATM) card.
Customers can use the Check Card for purchases at any merchant accepting Visa
and at any ATM displaying the HONOR(R) and CIRRUS(R) networks regionally and
worldwide, respectively.

Net proceeds from this offering will be allocated to corporate purposes
that allow the Company to expand the scope of its strategy and better serve the
people of the Uwharrie Lakes Region. Such corporate purposes include: (a)
improving banking equipment and operating systems, providing new product lines,
and implementing technological advances at the Company and the Bank and its
subsidiaries; (b) providing funds for internal growth and expansion at the
Company and the Bank

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and its subsidiaries through the hiring of new management personnel; and (c)
financing de novo expansion or acquisitions for the Bank and its subsidiaries
that complement existing operations.

The Company's executive offices are located at 167 North Second Street,
Albemarle, North Carolina 28002-0338, and its telephone number is (704)
983-6181.

THE OFFERING AND PLAN OF DISTRIBUTION

The shares of Common Stock to be issued are being offered at the purchase
price of $ per share pursuant to nontransferable subscription rights to
("Existing Shareholders") for the first 30 days of the Offering, or until 5:00
p.m. Eastern Time on , 1998 (the "Shareholder Offering"). In the event
that Existing Shareholders subscribe for a number of shares in excess of the
total number of shares offered, subscriptions will be allocated on a pro rata
basis within the purchase limitations of this Offering. If shares remain
unsubscribed at the end of the Shareholder Offering, they will be offered at
the same price and with the same purchase limitations on a
first-come-first-serve basis to the following (the "Public Offering"); (i)
existing customers on the Record Date of the Bank or any of its subsidiaries;
(ii) businesses in, residents of, or persons having property interests in the
Uwharrie Lakes Region; and (iii) other persons or businesses outside of the
Uwharrie Lakes Region subject to the approval of the Company's Board of
Directors.

The Offering will expire at the earlier of: (i) subscriptions accepted for
all of the shares offered, or (ii) 5:00 p.m., Eastern Time on December 31, 1998
(the "Expiration Date"): unless extended by resolution of the Board of
Directors of the Company, but in such event, would last no later than 5:00 p.m.
on March 31, 1999. No person, including individuals on a joint account together
with associates or persons acting in concert therewith may purchase fewer than
200 shares of Common Stock, and no more than 25,000 shares of Common Stock, in
the Offering. The Board of Directors of the Company may increase or decrease
these purchase limitations at any time. Should any such changes occur, all
subscribers and potential subscribers will be notified. The Company reserves
the absolute right to accept or reject any orders in the Offering, in whole or
in part, for any reason, either at the time of receipt of order or as soon as
practicable following the Expiration Date.

Accountholders in the Bank purchasing between 200 and 500 shares of Common
Stock and meeting certain credit standards of the Company may purchase their
shares pursuant to an installment purchase plan ("Purchase Plan") (a
"Participant"). Pursuant to the Purchase Plan, the Participant will execute a
promissory note (the "Note") to the Company providing that the total cost of
the shares to be purchased is to be amortized over a 24 month term at no
interest with monthly payments being debited to the Participant's deposit
account at the Bank. No downpayment is required, but a Participant must pay the
first month's payment in advance upon execution of the Note. The shares to be
purchased will be held in escrow until the end of the term of the Note with any
cash distributions or dividends on such shares being credited toward the amount
owed for their purchase. In the case of a default and failure to cure (as
defined in the Note,) the Participant will be charged an "administrative fee"
of 10% of the total purchase price of the shares. Upon default and failure to
cure, the amount of shares for which payment has been received, or at the
option of the Participant, the payments made, minus the administrative cost fee
incurred, shall be refunded to the Participant.

The Company has established a Stock Information Center, which will be
staffed with representatives of The Meritas Group, Inc., a firm offering
financial advisory services to the Company for the Subscription Offering, to
coordinate the Subscription Offering, including tabulation of orders and
answering questions about the Subscription Offering by telephone. All
subscribers will be instructed to mail payment to the Stock Information Center.
Payment for shares of Common Stock may be made by cash (if delivered in
person), check, bank draft, or money order or by authorization of withdrawal
from existing deposit accounts maintained with the Bank (without penalty for
early withdrawal).

Offers to purchase or sale will only be made by means of this Prospectus.
Subscription Offer Forms will be distributed only with this Prospectus. The
executed Subscription Offer Form must be accompanied by appropriate payment.
All funds received during the Offering will be held in an escrow account at the
Bank drawing interest at the Bank's money market rates existing at the time of
the commencement of the Offering. If the aggregate minimum number of shares
offered hereby is not sold by the Expiration Date, or any extension thereof,
all funds received from subscribers, plus interest from date of receipt, will
be refunded and no shares will be sold.

The amount of proceeds from the sale of the Common Stock in the Offering
will depend upon the total number of shares actually sold in and the actual
expenses of the Offering. As a result, the actual net proceeds from the sale of
the Common Stock cannot be determined until the Offering is completed.

See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.

3
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------
1998 1997
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(IN THOUSANDS EXCEPT PER
SHARE, RATIO AND OTHER DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income .......................... $ 3,257 $ 2,993
Provision for loan losses .................... 65 85
Non-interest income .......................... 760 726
Non-interest expense ......................... 2,998 2,725
Net income ................................... 657 626
BALANCE SHEET DATA:
Assets ....................................... $ 154,001 $ 142,619
Loans ........................................ 117,625 108,731
Allowance for loan losses .................... 1,162 1,100
Deposits ..................................... 127,925 113,479
Other borrowings ............................. 12,068 16,756
Shareholders' equity ......................... 13,276 11,872
PER COMMON SHARE DATA:
Net income, basic (4) ........................ $ 0.14 $ 0.14
Net income, diluted (4) ...................... 0.14 0.13
Cash dividends declared (4) .................. -- --
Book value ................................... 5.79 5.46
OTHER DATA:
Branch offices ............................... 5 5
Full-time employees .......................... 64 56
PERFORMANCE RATIOS (2):
Return on average assets ..................... 0.89% .91%
Return on average equity ..................... 10.27% 10.98%
Net interest margin (taxable
equivalent) ................................. 4.78% 4.73%
Dividend payout .............................. -- --
Efficiency (3) ............................... 74.60% 73.20%
ASSET QUALITY RATIOS:
Allowance for loan losses to loans at
end of period ............................... 0.99% 1.01%
Allowance for loan losses to non-
performing loans at end of period ........... 281.40% 257.00%
Net charge-offs to average loans (2) ......... 0.04% 0.07%
Non-performing assets to loans ............... 0.35% 0.39%
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ............. 8.65% 8.27%
Leverage ..................................... 8.57% 8.29%
Tier 1 risk-based ............................ 12.78% 12.73%
Total risk-based ............................. 13.93% 13.94%
Average loans to average deposits ............ 97.71% 95.73%
Average loans to average deposits and
borrowings .................................. 83.94% 83.65%

<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
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(IN THOUSANDS EXCEPT PER SHARE, RATIO AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income .......................... $ 6,140 $ 5,529 $ 4,862 $ 4,684 $ 4,436
Provision for loan losses .................... 183 137 77 181 185
Non-interest income .......................... 1,491 1,361 1,183 270 1,183
Non-interest expense ......................... 5,722 5,277 4,988 4,551 4,116
Net income ................................... 1,186 1,026 781 260(1) 1,015
BALANCE SHEET DATA:
Assets ....................................... $ 145,704 $ 133,876 $ 120,839 $112,124 $ 102,383
Loans ........................................ 113,985 100,852 90,948 80,074 69,171
Allowance for loan losses .................... 1,125 1,050 975 922 1,025
Deposits ..................................... 116,905 104,599 95,794 93,235 84,469
Other borrowings ............................. 15,584 17,421 13,275 8,886 7,161
Shareholders' equity ......................... 12,534 11,303 10,913 9,724 10,413
PER COMMON SHARE DATA:
Net income, basic (4) ........................ $ 0.26 $ 0.22 $ 0.17 $ 0.06 $ 0.22
Net income, diluted (4) ...................... 0.25 0.22 0.17 0.06 0.22
Cash dividends declared (4) .................. -- 0.05 0.04 0.04 0.03
Book value ................................... 5.49 4.95 4.76 4.14 4.49
OTHER DATA:
Branch offices ............................... 5 5 5 5 5
Full-time employees .......................... 60 52 50 49 46
PERFORMANCE RATIOS (2):
Return on average assets ..................... 0.84% 0.80% 0.69% 0.24% 1.03%
Return on average equity ..................... 10.04% 9.22% 7.48% 2.58% 10.38%
Net interest margin (taxable
equivalent) ................................. 4.76% 4.70% 4.74% 4.79% 5.73%
Dividend payout .............................. -- 21.10% 24.28% 73.03% 15.94%
Efficiency (3) ............................... 75.20% 76.90% 83.30% 79.00% 74.80%
ASSET QUALITY RATIOS:
Allowance for loan losses to loans at
end of period ............................... 0.99% 1.04% 1.07% 1.15% 1.48%
Allowance for loan losses to non-
performing loans at end of period ........... 241.90% 226.30% 297.30% 192.90% 75.20%
Net charge-offs to average loans (2) ......... 0.09% 0.06% 0.03% 0.36% 0.24%
Non-performing assets to loans ............... 0.41% 0.46% 0.36% 0.24% 1.44%
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ............. 8.41% 8.68% 9.20% 9.39% 9.94%
Leverage ..................................... 8.49% 8.33% 8.78% 9.30% 10.63%
Tier 1 risk-based ............................ 12.57% 12.92% 13.19% 12.70% 14.06%
Total risk-based ............................. 13.72% 14.15% 14.42% 13.90% 15.45%
Average loans to average deposits ............ 96.51% 95.63% 86.26% 81.15% 77.99%
Average loans to average deposits and
borrowings .................................. 84.09% 83.41% 76.73% 74.40% 74.75%
</TABLE>

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(1) Includes non-recurring loss of $802,000 from sale of securities in a
restructuring of the investment portfolio.

(2) Annualized for the six months ended June 30, 1998 and 1997.

(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, exclusive of gains and losses on sales of
securities.

(4) Adjusted for the effects of the 3% stock dividend paid in 1994, 1995 and
1996, the 5% stock dividend paid in 1997, and the two-for-one stock split
effected in the form of a 100% stock dividend declared July 21, 1998,

4
<PAGE>

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS SHOULD CONSIDER THE
FOLLOWING FACTORS CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. SEE ALSO "FORWARD LOOKING
STATEMENTS."

COMMUNITY COMMITMENT AND SOCIAL RESPONSIBILITY

The Company is community oriented and emphasizes the well-being of the
people in its region above financial gain in directing its corporate decisions.
As a result, the Company attempts to attract investors from its primary service
area and region that share its view of the Company as a corporate citizen
seeking financial growth and stability for its community, while at the same
time maintaining that atmosphere and dignity that have made its community an
ideal place to live and raise a family. In furtherance thereof, the Company's
Articles of Incorporation and Bylaws contain provisions meant to encourage and
maintain its commitment and social responsibility to its community. See the
discussion under "Executive Officers and Directors" and see also "Certain
Articles and Bylaw Provisions Having Potential Anti-Takeover Effects -- BOARD
CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY." In addition, the Company allocates a considerable amount of its
net revenues toward philanthropic projects in its community. For instance, the
Company is currently involved in a proposal to implement the "Central Park
Vision" for the Uwharrie Lakes Region. The Central Park Vision is an attempt to
develop an alternative economic development strategy to that historically
followed in the Uwharrie Lakes Region and other rural communities, that have
not participated equally in North Carolina's strong economic development over
the past several decades. The strategy involves using the existing rural
character, recreational venues, and historical assets of the Uwharrie Lakes
Region alongside the economic growth of North Carolina's metropolitan areas as
a foundation for a new economic development strategy. The Company is one of
several active participants in the Central Park Vision investing time and
resources in formulating such a development plan. In sum, the Company's
practice of directing its corporate decisions in a manner that is socially
responsible to the community could be adverse to an investor interested in a
company that only seeks to maximize its profitability.

COMPETITION WITH OTHER FINANCIAL INSTITUTIONS

Commercial banking in North Carolina is extremely competitive, due in
large part to statewide branching. Currently, many of the Company's competitors
are significantly larger and have greater resources than the Company. The
Company encounters significant competition from a number of sources, including
other bank holding companies, commercial banks, thrift and savings and loan
institutions, credit unions, and other financial institutions and financial
intermediaries. Among commercial banks, the Bank competes in its market area
with some of the largest banking organizations in the state, several of which
have hundreds of branches in North Carolina and billions of dollars in assets.
Moreover, competition is not limited to financial institutions based in North
Carolina. The enactment of federal legislation authorizing nationwide
interstate banking has greatly increased the size and financial resources of
some of the Company's competitors. Consequently, many of the Company's
competitors have substantially higher lending limits due to their greater total
capitalization, and may perform functions for their customers that the Company
currently does not offer. As a result, the Company could encounter increased
competition in the future that may limit its ability to maintain or increase
its market share or otherwise materially and adversely affect its business,
results of operations and financial condition. See "Business -- Competition."

GROWTH OPPORTUNITIES

The proceeds of the Offering will be used to enhance the capital position
of the Company, the Bank and its subsidiaries, and to support future asset
growth. See "Use of Proceeds." In the future, the Bank may expand its business
through selective de novo branch openings and possible branch or whole bank
acquisitions that complement its existing operations in the Uwharrie Lakes
Region. However, at this time, the Bank has not entered into any agreement or
engaged in any substantive or material negotiations with third parties
regarding any branch or whole bank acquisitions. There can be no assurance that
any such transactions, if or when consummated, will not have a material adverse
effect on the Bank's business, results of operations or financial condition.

POTENTIAL IMPACT OF CHANGES IN INTEREST RATES

The profitability of the Company depends to a large extent upon its net
interest income, which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The net interest
income of the Company would be adversely affected if changes in market interest
rates resulted in the cost of interest-bearing liabilities increasing faster
than the increase in the yield on the

5
<PAGE>

interest-earning-assets of the Company. An increase in interest rates could
have a material adverse effect on the housing and automobile industries and
consumer spending generally, which could adversely affect the results of
operations and financial condition of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

GOVERNMENTAL REGULATION

The Company, the Bank and its subsidiaries are subject to extensive
supervision, regulation and control by several federal and state governmental
agencies, including the Federal Reserve Board, the North Carolina State Banking
Commission, the FDIC, the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the NASD and the North Carolina Department of
Insurance. Future legislation and government policy could adversely affect the
Company and the financial institutions industry as a whole, including the cost
of doing business. Certain recently enacted or proposed legislation or
regulations, and future legislation or regulations, could have an adverse
effect on both the costs of doing business and the competitive factors facing
the financial institutions industry. Although the impact of such legislation
and regulation cannot be predicted, future changes may alter the structure of,
and competitive relationships among, financial institutions and the cost of
doing business. In addition, federal regulatory authorities have the power in
certain circumstances to prohibit dividends and other payments from the
Company. See "Business -- Supervision and Regulation."

COMPOSITION OF REAL ESTATE LOAN PORTFOLIO

The real estate loan portfolio of the Bank includes residential mortgages
and construction and commercial loans secured by real estate. The Bank
generates all of its real estate mortgage loans in North Carolina. Therefore,
conditions of the real estate markets in North Carolina could strongly
influence the level of the Bank's nonperforming mortgage loans and the results
of operations and financial condition of the Bank. Real estate values and the
demand for mortgages and construction loans are affected by, among other
things, changes in general or local economic conditions, changes in
governmental rules or policies, the availability of loans to potential
purchasers, and acts of nature. Although the Bank's underwriting standards are
intended to protect the Bank against adverse general and local real estate
trends, declines in real estate markets could adversely impact the demand for
new real estate loans, the value of the collateral securing the Bank loans and
the results of operations and financial condition of the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

EXPOSURE TO LOCAL ECONOMIC CONDITIONS

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

MONETARY POLICY

The operating results of the Company are affected by credit policies of
monetary authorities, particularly the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include open market operations
in U.S. Government securities, changes in the discount rate on bank borrowings
and changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company.

IMPACT OF TECHNOLOGICAL ADVANCES; UPGRADE TO COMPANY'S INFRASTRUCTURE

The financial services industry is undergoing, and management believes
will continue to undergo, technological changes with frequent introductions of
new technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is critical
for the Company in light of its strategy to

6
<PAGE>

continue its sustained pace of growth. As a result, the Company intends to
continue to upgrade its internal systems, both through the efficient use of
technology (including software applications) and by strengthening its policies
and procedures. At the same time, the Company anticipates that it will expand
its array of technology-based products to its customers.

YEAR 2000 COMPLIANCE

As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Company's, were designed to accommodate a two-digit year. For
example, "96" is stored on the system and represents 1996. CDS processes the
Company's computer and data processing needs, and is in the process of
modifying, upgrading or replacing its computer applications to insure Year 2000
compliance. The Company and its subsidiaries are actively engaged in the
execution of a five phase initiative as outlined by the Federal Financial
Institutions Examination Council to address the readiness of the Company and
associated interdependent business relationships. These phases are 1)
Awareness, 2) Assessment, 3) Renovation, 4) Validation (Testing), and 5)
Implementation. A Year 2000 Steering Committee comprised of members of
executive management appointed by the Company's Board of Directors is
responsible for project oversight. A Year 2000 Task Force has been named to
execute the initiative and is working diligently to ensure that time lines and
objectives are met. Under such initiative, the Company will examine the need
for modifications or replacement of all non-Year 2000 compliant pieces of
software. At this stage of its initiative, the Company expects the cost of its
Year 2000 compliance program will not be material to the Company's financial
condition or operation. In the event that the Company's significant suppliers
do not successfully and timely achieve Year 2000 compliance, the Company's
business, results of operations or financial condition could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

USE OF PROCEEDS

The Company will receive net proceeds of $ million if the maximum
amount offered is sold and net proceeds of $ million if the minimum amount
offered is sold, after deducting offering expenses to the Company estimated at
approximately $ . The Company intends to use the net proceeds for general
corporate purposes, such as:

a. The infusion of capital into the Bank and its subsidiaries for
improving their equipment and operating systems, implementing technological
advances associated with the financial services industry, and providing new
product lines;

b. The infusion of capital into the Bank and its subsidiaries for internal
growth and expansion through the hiring of new management personnel;

c. The financing of de novo branch (and possibly whole bank) expansion and
of acquisitions for the Bank and its subsidiaries that complement or expand
existing operations.

In today's ever-changing financial services industry, the Company, and the
Bank and its subsidiaries, on occasion and when in the best interests of the
Company's shareholders, review and consider possible acquisitions or de novo
expansions, and, in certain instances, enter into discussions with third
parties regarding the same. Neither the Company nor the Bank or its
subsidiaries have entered into any agreement or are engaged in any substantive
or material negotiations with third parties regarding any branch or whole bank
acquisitions.

OFFERING PRICE OF COMMON STOCK

It is the philosophy of the Company to encourage local ownership of the
Common Stock which is neither listed nor traded on a broker-dealer market. The
Common Stock is traded locally among willing buyers and sellers, and the
Company makes every reasonable effort to match willing buyers and sellers as
they become known. In addition, the Company has adopted programs of on-going
open market purchases of shares of the Common Stock. Approximately 29,461
shares of the Common Stock traded during 1997. During December of 1997, the
Company issued a 5% stock dividend, and in 1996, paid cash dividends of $.10
per share and issued a 3% stock dividend.

On July 21, 1998, the Company declared a 2-for-1 stock split effected in
the form of a 100% stock dividend to shareholders of record on August 4, 1998
and payable August 20, 1998. As of June 30, 1998, the Company had 2,294,536
shares outstanding and 1,619 shareholders of record. To the best knowledge of
the Company, the Common Stock traded at $ per share, as of , 1998. Based
on the Company's outstanding shares as of June 30, 1998, the Company will have
4,589,072 shares outstanding immediately after the 100% stock dividend is paid
on August 20, 1998.

7
<PAGE>

The combination of private trades and the Company's purchases has provided
liquidity for the Company's Common Stock and a periodic record of the trading
price of the Common Stock. As a result of the Common Stock's historical trading
price and the anticipated effect of the 100% stock dividend to be paid on
August 20, 1998, the offering price of the Common Stock has been established at
$ .

The Meritas Group, Inc., a firm experienced in valuing financial
institutions, has made an independent valuation of the estimated market value
of the Common Stock of the Company. Meritas has determined that as of , such
estimated market value ranged from $ to $ . The Company, in consultation
with its advisors, has determined to offer the shares of Common Stock at the
purchase price of $ per share. Such appraisal is not intended and must not be
construed as a recommendation of any kind as to the advisability of purchasing
such shares or as any form of assurance that after the Offering, such shares
may be resold at or above the purchase price.

DIVIDENDS

Historically, the Company has paid a combination of a cash and stock
dividends, annually during the fourth calendar quarter. In 1997, in
consideration of recently enacted changes in tax law that made available to a
broader spectrum of taxpayers reduced rates of federal taxation on certain
capital gains, the Company eliminated the cash dividend and increased the stock
dividend. The following is a summary of dividends paid in the last five years.

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Stock dividend paid .................................................... 5% 3% 3% 3% 3%
Cash dividend per share ................................................ -- $ .10 $ .09 $ .09 $ .08
Cash dividend as adjusted to reflect all subsequent stock dividends (1) -- $ .05 $ .04 $ .04 $ .03
</TABLE>

- ---------
(1) Includes the two-for-one stock split, effected in the form of a 100% stock
dividend, declared July 21, 1998.

Because the Company's principal operations are conducted through the Bank,
it generates cash to pay dividends primarily through dividends paid to it by
the Bank. However, there are certain regulatory restrictions on the Bank's
ability to transfer funds to the Company in the form of cash dividends. See
"Business -- Supervision and Regulation." Pursuant to the regulatory
restrictions, as of June 30, 1998, $ of the Bank's retained earnings were
available for distribution to the Company without prior regulatory approval.

North Carolina corporate law precludes any distribution to shareholders,
including the payment of a dividend, if, after giving effect to the
distribution, the Company would not be able to pay its debts as they become due
in the usual course of business or the Company's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. The
Company has no shareholders who currently have preferential rights over the
holders of the Common Stock. See "Description of Capital Stock."

Future dividends will be determined by the Company's Board of Directors in
light of circumstances existing from time-to-time, including the Company's
growth, financial condition and results of operations, the continued existence
of the restrictions described above and other factors that the Company's Board
of Directors considers relevant.

8
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at June 30, 1998, and as adjusted to give effect to the two-for-one
stock split, effected in the form of a 100% stock dividend which was declared
on July 21, 1998, and as adjusted to give effect to the sale by the Company of
the minimum and maximum number of shares of Common Stock offered hereby. This
table should be read in conjunction with the Company's audited and unaudited
consolidated financial statements, including the notes thereto, elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1998
--------------------------------------------------------
AS AS AS
ACTUAL ADJUSTED (1) ADJUSTED (2) ADJUSTED (3)
------------ -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value, 6,000,000 shares authorized:
Number of shares issued and outstanding (4) ............... 2,294,536 4,589,072 4,789,072 5,439,072
Par value ................................................... $ 2,868 $ 5,736 $ 5,986 $ 6,799
Additional paid-in capital .................................. 5,578 2,710
Undivided profits ........................................... 4,496 4,496 4,496 4,496
Accumulated other comprehensive income (5) .................. 334 334 334 334
---------- ---------- ---------- ----------
Total Shareholders' Equity ............................... $ 13,276 $ 13,276 $ 10,816 $ 11,629
========== ========== ========== ==========
</TABLE>

- ---------
(1) Gives effect to the two-for-one stock split, effected in the form of a 100%
stock dividend, declared July 21, 1998, and payable on August 20, 1998 to
shareholders of record on August 4, 1998.

(2) Gives effect to the two-for-one stock split and to the sale of 200,000
shares of Common Stock offered hereunder.

(3) Gives effect to the two-for-one stock split and to the sale of 850,000
shares of Common Stock offered hereunder.

(4) Excludes 276,197 shares (552,394 shares after giving effect to the
two-for-one stock split) of Common Stock reserved for issuance upon the
exercise of stock options outstanding at June 30, 1998.

(5) Consists of $334,000 in unrealized gains on available for sale investment
securities, net of applicable deferred income taxes.

9
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data
concerning the Company and its subsidiaries qualified in its entirety by the
detailed information and consolidated financial statements, including notes
thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------- -------------
(IN THOUSANDS EXCEPT PER
SHARE, RATIO AND OTHER DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Interest income ......................... $ 5,787 $ 5,377
Interest expense ........................ 2,530 2,384
Net interest income ..................... 3,257 2,993
Provision for loan losses ............... 65 85
Net interest income after provision ..... 3,192 2,908
Non-interest income ..................... 760 726
Non-interest expense .................... 2,998 2,725
Income before income taxes............... 954 909
Income tax expense ...................... 297 283
Net income .............................. 657 626
BALANCE SHEET DATA:
Assets .................................. $ 154,001 $ 142,619
Loans ................................... 117,625 108,731
Allowance for loan losses ............... 1,162 1,100
Deposits ................................ 127,475 113,479
Other borrowings ........................ 12,068 16,756
Shareholders' equity .................... 13,276 11,872
PER COMMON SHARE DATA:
Net income, basic (4) ................... $ 0.14 $ 0.14
Net income, diluted (4) ................. 0.14 0.13
Cash dividends declared (4) ............. -- --
Book value .............................. 5.79 5.46
OTHER DATA:
Branch offices .......................... 5 5
Full-time employees ..................... 64 56
PERFORMANCE RATIOS (2):
Return on average assets ................ 0.89% .91%
Return on average equity ................ 10.27% 10.98%
Net interest margin (taxable
equivalent) ............................ 4.78% 4.73%
Dividend payout ......................... -- --
Efficiency (3) .......................... 74.60% 73.20%
ASSET QUALITY RATIOS:
Allowance for loan losses to loans
at end of period ....................... 0.99% 1.01%
Allowance for loan losses to
non-performing loans at end of
period ................................. 281.40% 257.00%
Net charge-offs to average loans (2)..... 0.04% 0.07%
Non-performing assets to loans .......... 0.35% 0.39%
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ........ 8.65% 8.27%
Leverage ................................ 8.57% 8.29%
Tier 1 risk-based ....................... 12.78% 12.73%
Total risk-based ........................ 13.93% 13.94%
Average loans to average deposits ....... 91.71% 95.73%
Average loans to average deposits
and borrowings ......................... 83.94% 83.65%

<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE, RATIO AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ......................... $ 11,019 $ 10,040 $ 8,913 $ 7,692 $ 7,025
Interest expense ........................ 4,879 4,511 4,051 3,008 2,589
Net interest income ..................... 6,140 5,529 4,862 4,684 4,436
Provision for loan losses ............... 183 137 77 181 185
Net interest income after provision ..... 5,957 5,392 4,785 4,503 4,251
Non-interest income ..................... 1,491 1,361 1,183 270(1) 1,183
Non-interest expense .................... 5,722 5,277 4,988 4,551 4,116
Income before income taxes............... 1,726 1,476 980 222 1,318
Income tax expense ...................... 540 450 199 (38) 303
Net income .............................. 1,186 1,026 781 260(1) 1,015
BALANCE SHEET DATA:
Assets .................................. $ 145,704 $ 133,876 $ 120,839 $112,124 $ 102,383
Loans ................................... 113,985 100,852 90,948 80,074 69,171
Allowance for loan losses ............... 1,125 1,050 975 922 1,025
Deposits ................................ 116,905 104,599 95,794 93,235 84,469
Other borrowings ........................ 15,584 17,421 13,275 8,886 7,161
Shareholders' equity .................... 12,534 11,303 10,913 9,724 10,413
PER COMMON SHARE DATA:
Net income, basic (4) ................... $ 0.26 $ 0.22 $ 0.17 $ 0.06 $ 0.22
Net income, diluted (4) ................. 0.25 0.22 0.17 0.06 0.22
Cash dividends declared (4) ............. -- 0.05 0.04 0.04 0.03
Book value .............................. 5.49 4.95 4.76 4.14 4.49
OTHER DATA:
Branch offices .......................... 5 5 5 5 5
Full-time employees ..................... 60 52 50 49 46
PERFORMANCE RATIOS (2):
Return on average assets ................ 0.84% 0.80% 0.69% 0.24% 1.03%
Return on average equity ................ 10.04% 9.22% 7.48% 2.58% 10.38%
Net interest margin (taxable
equivalent) ............................ 4.76% 4.70% 4.74% 4.79% 5.73%
Dividend payout ......................... -- 21.10% 24.28% 73.03% 15.94%
Efficiency (3) .......................... 75.20% 76.90% 83.30% 79.00% 74.80%
ASSET QUALITY RATIOS:
Allowance for loan losses to loans
at end of period ....................... 0.99% 1.04% 1.07% 1.15% 1.48%
Allowance for loan losses to
non-performing loans at end of
period ................................. 241.90% 226.30% 297.30% 192.90% 75.20%
Net charge-offs to average loans (2)..... 0.09% 0.06% 0.03% 0.36% 0.24%
Non-performing assets to loans .......... 0.41% 0.46% 0.36% 0.24% 1.44%
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ........ 8.41% 8.68% 9.20% 9.39% 9.94%
Leverage ................................ 8.49% 8.33% 8.78% 9.30% 10.63%
Tier 1 risk-based ....................... 12.57% 12.92% 13.19% 12.70% 14.06%
Total risk-based ........................ 13.72% 14.15% 14.42% 13.90% 15.45%
Average loans to average deposits ....... 96.51% 95.63% 86.26% 81.15% 77.99%
Average loans to average deposits
and borrowings ......................... 84.09% 83.41% 76.73% 74.40% 74.75%
</TABLE>

- ---------
(1) Includes non-recurring loss of $802,000 from sale of securities in a
restructuring of the investment portfolio.
(2) Annualized for the six months ended June 30, 1998 and 1997.
(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, exclusive of gains and losses on sales of
securities.
(4) Adjusted for the effects of the 3% stock dividend paid in 1994, 1995 and
1996, the 5% stock dividend paid in 1997, and the two-for-one stock split
effected in the form of a 100% stock dividend paid August 20, 1998.

10
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the major components
of the results of operations and financial condition, liquidity and capital
resources of the Company and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.

The discussion and tabular data presented below analyzes major factors and
trends regarding the financial condition and results of operations of Uwharrie
Capital Corp and its subsidiaries for the six month periods ended June 30, 1998
and 1997 and for each of the years in the three year period ended December 31,
1997. On July 21, 1998, the Company's Board of Directors declared a two-for-one
stock split, effected in the form of a 100% stock dividend, payable on August
20, 1998 to stockholders' of record on August 4, 1998. All financial statement
information presented below has been restated to reflect the two-for-one stock
split. This discussion should be read in conjunction with the consolidated
financial statements and other financial information presented elsewhere in
this Prospectus.

RESULTS OF OPERATIONS

SUMMARY

Net income for the six months ended June 30, 1998 totaled $657,000, an
increase of $31,000 or 4.9% over the six months ended June 30, 1997. An
increase of $264,000 in net interest income was largely offset by an increase
of $229,000 in personnel costs. Net income per share was $0.14 for the
six-month periods ended June 30, 1998 and 1997.

Net income for 1997 was $1.2 million or $0.26 per share as compared with
net income of $1.0 million or $0.22 per share for 1996 and $781,000 or $0.17
per share for 1995.

The increase from 1996 to 1997 was attributable to increases of $611,000
and $130,000 in net interest income and noninterest income, respectively, which
more than offset increases of $46,000 and $445,000, respectively, in the
provision for loan losses and noninterest expenses.

The increase from 1995 to 1996 was attributable to increases of $667,000
and $178,000 in net interest income and noninterest income, respectively, which
more than offset increases of $60,000 and $289,000, respectively, in the
provision for loan losses and noninterest expenses.

NET INTEREST INCOME

Net interest income, the major component of the Company's income, is the
amount by which interest generated by earning assets (primarily loans and
investment securities) exceeds the cost of funds (primarily deposits and other
borrowings) supporting them. Net interest income represents the gross profit
from the lending and investment activities of a banking organization and is the
most significant factor affecting the earnings of the Company. Net interest
income is affected by changes in interest rates, volume and the mix of these
various components. The following tables present average balance sheets and a
net interest income analysis for the six months ended June 30, 1998 and 1997
and for each of the years in the three year period ended December 31, 1997:

11
<PAGE>

AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
AT JUNE 30,
1998 1998
--------------------------- ---------------------------------------
INTEREST
AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE YIELD/RATE(1) BALANCE EXPENSE YIELD/RATE (1)
----------- --------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Taxable securities ..................... $ 21,992 6.54% $ 21,025 $ 657 6.30%
Non-taxable securities ................. 5,501 8.88% 5,662 166 9.10%
Short-term
investments (2) ....................... 1,427 6.44% 367 19 8.08%
Loans (3) .............................. 116,462 8.39% 114,231 4,945 8.73%
-------- ---- -------- ------ ----
Total interest-earning assets .......... 145,382 8.11% 141,285 5,787 8.38%
-------- ---- -------- ------ ----
Non-earning assets: ....................
Cash and due from banks ................ 4,004 4,154
Premises and equipment, net ............ 2,429 2,089
Interest receivable and other .......... 2,186 1,659
-------- --------
Total non-earning assets ............... 8,619 7,902
-------- --------
Total assets ........................... $154,001 $149,187
======== ========
Interest-bearing liabilities:
Savings deposits ....................... $ 33,670 4.02% $ 32,987 664 4.06%
Transaction and MMDA deposits .......... 28,123 2.33% 28,483 325 2.30%
Other time deposits .................... 50,074 5.20% 45,346 1,168 5.19%
-------- ---- -------- ------ ----
Total deposits ........................ 111,867 4.12% 106,816 2,157 4.07%
Short-term borrowed funds .............. 5,117 4.38% 7,928 191 4.86%
Long-term debt ......................... 6,951 6.22% 5,702 182 6.44%
-------- ---- -------- ------ ----
Total interest-bearing liabilities ..... 123,935 4.25% 120,446 2,530 4.24%
-------- ---- -------- ------ ----
Non-interest-bearing liabilities:
Transaction deposits, interest
payable and other ..................... 16,790 15,841
-------- --------
Total liabilities ...................... 140,725 136,287
-------- --------
Shareholders' equity ................... 13,276 12,900
-------- --------
Total liabilities and shareholders'
equity................................. $154,001 $149,187
======== ========
Interest rate spread ................... 3.86% 4.14%
Net interest income and net interest
margin ................................ $3,257 4.78%
======

<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1997
-------------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE (1)
----------- --------- ---------------
<S> <C> <C> <C>
Interest earning assets:
Taxable securities ..................... $ 20,250 $ 653 6.50%
Non-taxable securities ................. 5,742 171 9.24%
Short-term
investments (2) ....................... 544 16 5.93%
Loans (3) .............................. 105,082 4,537 8.71%
-------- ------ ----
Total interest-earning assets .......... 131,618 5,377 8.38%
-------- ------ ----
Non-earning assets: ....................
Cash and due from banks ................ 4,226
Premises and equipment, net ............ 2,174
Interest receivable and other .......... 371
--------
Total non-earning assets ............... 6,771
--------
Total assets ........................... $138,389
========
Interest-bearing liabilities:
Savings deposits ....................... $ 28,452 572 4.05%
Transaction and MMDA deposits .......... 27,964 309 2.23%
Other time deposits .................... 40,501 1,044 5.20%
-------- ------ ----
Total deposits ........................ 96,917 1,925 4.01%
Short-term borrowed funds .............. 9,288 226 4.91%
Long-term debt ......................... 7,457 233 6.30%
-------- ------ ----
Total interest-bearing liabilities ..... 113,662 2,384 4.23%
-------- ------ ----
Non-interest-bearing liabilities:
Transaction deposits, interest
payable and other ..................... 13,234
--------
Total liabilities ...................... 126,896
--------
Shareholders' equity ................... 11,493
--------
Total liabilities and shareholders'
equity................................. $138,389
========
Interest rate spread ................... 4.15%
Net interest income and net interest
margin ................................ $2,993 4.73%
======
</TABLE>

12
<PAGE>

AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE (1) BALANCE EXPENSE RATE (1)
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Taxable securities ............................ $ 18,753 $ 1,267 6.76% $ 17,679 $ 1,095 6.19%
Non-taxable securities ........................ 5,760 340 9.08% 5,915 350 9.10%
Short-term investments (2) .................... 541 34 6.28% 753 43 5.71%
Loans (3) ..................................... 107,696 9,378 8.71% 97,201 8,552 8.80%
-------- ------- ---- -------- ------- ----
Total interest-earning assets ................. 132,750 11,019 8.44% 121,548 10,040 8.41%
-------- ------- ---- -------- ------- ----
Non-earning assets:
Cash and due from banks ....................... 3,799 3,761
Premises and equipment, net ................... 2,311 2,069
Interest receivable and other ................. 1,648 815
-------- --------
Total non-earning assets ...................... 7,758 6,645
-------- --------
Total assets .................................. $140,508 $128,193
======== ========
Interest-bearing liabilities:
Savings deposits .............................. $ 29,548 1,204 4.07% $ 27,050 1,100 4.07%
Transaction and MMDA deposits ................. 28,195 644 2.28% 23,153 462 2.00%
Other time deposits ........................... 40,678 2,123 5.22% 39,823 2,124 5.33%
-------- ------- ---- -------- ------- ----
Total deposits ............................... 98,421 3,971 4.03% 90,026 3,686 4.09%
Short-term borrowed funds ..................... 8,936 433 4.85% 8,187 394 4.82%
Long-term debt ................................ 7,546 475 6.29% 6,706 431 6.43%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities ............ 114,903 4,879 4.25% 104,919 4,511 4.30%
-------- ------- ---- -------- ------- ----
Noninterest-bearing liabilities:
Transaction deposits, interest payable
and other .................................... 13,787 12,151
-------- --------
Total liabilities ............................. 128,690 117,070
-------- --------
Shareholders' equity .......................... 11,818 11,123
-------- --------
Total liabilities and shareholders' equity $140,508 $128,193
======== ========
Interest rate spread .......................... 4.19% 4.11%
Net interest income and net interest
margin ....................................... $ 6,140 4.76% $ 5,529 4.70%
======= =======

<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995
--------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE (1)
----------- ---------- ---------
<S> <C> <C> <C>
Interest earning assets:
Taxable securities ............................ $ 18,034 $1,120 6.21%
Non-taxable securities ........................ 5,882 354 9.26%
Short-term investments (2) .................... 271 17 6.27%
Loans (3) ..................................... 82,630 7,422 8.98%
-------- ------ ----
Total interest-earning assets ................. 106,817 8,913 8.52%
-------- ------ ----
Non-earning assets:
Cash and due from banks ....................... 3,472
Premises and equipment, net ................... 2,050
Interest receivable and other ................. 1,196
--------
Total non-earning assets ...................... 6,718
--------
Total assets .................................. $113,535
========
Interest-bearing liabilities:
Savings deposits .............................. $ 19,831 836 4.22%
Transaction and MMDA deposits ................. 23,041 510 2.21%
Other time deposits ........................... 38,096 1,979 5.19%
-------- ------ ----
Total deposits ............................... 80,968 3,325 4.11%
Short-term borrowed funds ..................... 5,734 315 5.49%
Long-term debt ................................ 6,157 411 6.68%
-------- ------ ----
Total interest-bearing liabilities ............ 92,859 4,051 4.36%
-------- ------ ----
Noninterest-bearing liabilities:
Transaction deposits, interest payable
and other .................................... 10,231
--------
Total liabilities ............................. 103,090
--------
Shareholders' equity .......................... 10,445
--------
Total liabilities and shareholders' equity $113,535
========
Interest rate spread .......................... 4.16%
Net interest income and net interest
margin ....................................... $4,862 4.73%
======
</TABLE>

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

(2) Includes federal funds sold and due from banks -- interest-bearing.

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

Net interest income increased $264,000 or 8.8% from $3.0 million for the
six months ended June 30, 1997 to $3.3 million for the six months ended June
30, 1998. This increase was attributable to an increased volume of interest
earning assets. The net interest margin increased five basis points from 4.73%
in the first six months of 1997 to 4.78% in current period.

Interest income increased $410,000 or 7.6% for the six months ended June
30, 1998 primarily due to the increased volume of earning assets. Average
earning assets increased 7.3% to $141.3 million for the six months ended June
30, 1998 as compared with $131.6 million for the six months ended June 30,
1997. The two primary types of earning assets are loans and investment
securities. The income generated from these assets is a function of their
quality, growth and yield. The growth in earning assets was primarily the
result of demand for quality loans as average loans increased by $9.1 million
or 8.7%. Average investment securities increased $695,000 or 2.7%. The yield on
earning assets, computed on a tax equivalent basis, increased slightly from
8.24% to 8.26% for the six months ended June 30, 1998 and 1997, respectively.

The cost of funding sources increased $146,000 or 6.1% for the six months
ended June 30, 1998 due to an increased volume of average interest-bearing
liabilities of $6.8 million or 6.0%. The average rate paid on interest-bearing
liabilities increased one basis point from 4.23% in 1997 to 4.24% in 1998.
Strong deposit growth enabled the Company to reduce the level of borrowings
during the current period. Deposits increased to 88.7% of total
interest-bearing liabilities during the six months ended June 30, 1998 as
compared with 85.3% of total interest-bearing liabilities during the six months
ended June 30, 1997.

13
<PAGE>

Net interest income increased $611,000 or 11.1% from $5.5 million in 1996
to $6.1 million in 1997. This increase was attributable to a combination of an
increased volume of interest earning assets and an increase in the net interest
margin. The net interest margin increased six basis points from 4.70% in 1996
to 4.76% in 1997.

Interest income increased $979,000 or 9.8% in 1997 primarily due to the
increased volume of earning assets. Average earning assets increased 9.2% to
$132.8 million or 94.5% of average total assets in 1997, as compared with
$121.5 million or 94.8% of average total assets in 1996. The two primary types
of earning assets are loans and investment securities. The income generated
from these assets is a function of their quality, growth and yield. The growth
in earning assets was primarily the result of demand for quality loans as
average loans increased by $10.5 million or 10.8%. Average investment
securities increased $919,000 or 3.9%. The yield on earning assets, computed on
a tax equivalent basis, increased slightly from 8.41% in 1996 to 8.44% in 1997,
as a nine basis point decrease in the yield on loans was offset by a 57 basis
point increase in the yield on taxable securities.

The cost of funding sources increased $368,000 or 8.2% in 1997 primarily
due to an increased volume of average interest-bearing liabilities of $10.0
million or 9.5%. The average rate paid on interest-bearing liabilities
decreased five basis points from 4.30% in 1996 to 4.25% in 1997. The mix of
interest-bearing liabilities did not change significantly in 1997. The decrease
in the average rate paid on interest-bearing liabilities was primarily
attributable to a six basis point decrease in the rate paid on deposits, which
comprised 85.7% of average interest-bearing liabilities in 1997 and 85.8% of
average interest-bearing liabilities in 1996.

The net interest margin, computed by dividing net interest income by
average earning assets, reflects the impact of noninterest-bearing funds on net
interest income. The increase in the yield on earning assets, combined with the
decrease in the cost of interest-bearing liabilities and the increase in
noninterest-bearing liabilities combined to generate the increased net interest
margin in 1997.

Net interest income increased $667,000 or 13.7% from $4.9 million in 1995
to $5.5 million in 1996. This increase was attributable to an increased volume
of interest earning assets which was partially offset by a decrease in the
yield on earning assets. The net interest margin decreased three basis points
from 4.73% in 1995 to 4.70% in 1996. Average earning assets increased 13.8% to
$121.5 million in 1996 as compared with $106.8 million in 1995, an increase of
$14.7 million. Average loans, which increased from $82.6 million to $97.2
million, generated substantially all of the increase in average earning assets.
The cost of funding sources increased $460,000 primarily due to an increase in
the volume of interest-bearing liabilities of $12.1 million. The average rate
paid on interest-bearing liabilities decreased by six basis points from 4.36%
in 1995 to 4.30% in 1996.

14
<PAGE>

The preceding tables summarized net interest income and average yields and
rates paid for years and interim periods indicated, with yields presented on a
tax equivalent basis. The following table presents the changes in interest
income and expense attributable to volume and rate changes:

VOLUME AND RATE VARIANCE ANALYSIS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997 1997 COMPARED TO 1996
-------------------------------- ----------------------------------
VARIANCE VARIANCE
INCOME/ ATTRIBUTABLE TO INCOME/ ATTRIBUTABLE TO
EXPENSE --------------------- EXPENSE ----------------------
VARIANCE VOLUME RATE VARIANCE VOLUME RATE
---------- --------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Taxable securities ..................... $ 4 $ 24 $(20) $172 $ 70 $102
Non-taxable securities ................. (5) (1) (4) (10) (9) (1)
Other (1) .............................. 3 7 (4) (9) (13) 4
Loans, gross ........................... 408 398 10 826 918 (92)
------ ------ ------ ------ ------ ------
Total earning assets ................... 410 428 (18) 979 966 13
------ ------ ------ ------ ------ ------
INTEREST-BEARING LIABILITIES
Savings deposits ....................... 92 91 1 104 102 2
Transaction and MMDA deposits .......... 16 6 10 182 109 73
Other time deposits .................... 124 125 (1) (1) 45 (46)
Short-term borrowed funds .............. (35) (33) (2) 39 36 3
Long-term debt ......................... (51) (56) 5 44 53 (9)
------ ------ ------ ------ ------ -------
Total interest-bearing liabilities ..... 146 133 13 368 345 23
------ ------ ------ ------ ------ ------
Net interest income .................... $264 $295 $(31) $611 $621 $(10)
====== ====== ====== ====== ====== ======

<CAPTION>
1996 COMPARED TO 1995
--------------------------------
VARIANCE
INCOME/ ATTRIBUTABLE TO
EXPENSE -------------------
VARIANCE VOLUME RATE
------------ -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
EARNING ASSETS
Taxable securities ..................... $ (25) $ (22) $ (3)
Non-taxable securities ................. (4) 2 (6)
Other (1) .............................. 26 29 (3)
Loans, gross ........................... 1,130 1,295 (165)
------- ------ -------
Total earning assets ................... 1,127 1,304 (177)
------- ------ -------
INTEREST-BEARING LIABILITIES
Savings deposits ....................... 264 299 (35)
Transaction and MMDA deposits .......... (48) 2 (50)
Other time deposits .................... 145 91 54
Short-term borrowed funds .............. 79 126 (47)
Long-term debt ......................... 20 37 (17)
------- ------ -------
Total interest-bearing liabilities ..... 460 555 (95)
------- ------ -------
Net interest income .................... $ 667 $ 749 $ (82)
======= ====== =======
</TABLE>

- ---------
(1) Includes due from banks -- interest-bearing and federal funds sold.

PROVISION FOR LOAN LOSSES

The ratio of net charge-offs to average loans was 0.04% and 0.07% for the
six months ended June 30, 1998 and 1997, respectively. The provision for loan
losses for those periods was $65,000 and $85,000, respectively. For 1997, 1996
and 1995 the provision for loan losses of $183,000, $137,000 and $77,000,
respectively, represents a ratio of net charge-offs to average loans of 0.09%,
0.06% and 0.03%. The increasing trend in the provision for loan losses has been
primarily attributable to loan growth because net charge-offs and nonperforming
loans have remained at acceptable levels.

NONINTEREST INCOME

Noninterest income for the Company consists principally of service charges
on deposit accounts and commissions and fees earned by the Company's brokerage
and insurance subsidiaries. Service charges on deposit accounts totaled
$463,000 and $449,000 for the six months ended June 30, 1998 and 1997,
respectively, and $911,000, $901,000 and $775,000 for 1997, 1996 and 1995
respectively. Fee and commission income has increased steadily in recent years,
from $354,000 in 1995 to $391,000 in 1996, and then to $483,000 in 1997. For
the six month periods, fees and commissions have been $280,000 in 1998 and
$249,000 in 1997.

NONINTEREST EXPENSE

For the six months ended June 30, 1997, noninterest expense totaled $3.0
million, as compared with total noninterest expense for the six months ended
June 30, 1997 of $2.7 million, an increase of $273,000. Of this increase,
$229,000 was attributable to increased personnel costs. The Company has
incurred additional personnel costs to support its continued growth.
Additionally, personnel costs during the six months ended June 30, 1998 include
the costs of Company's Bank subsidiary's President, a position which was
created and filled in the first half of the year. Exclusive of personnel costs,
noninterest expense increased by 1.6% for the six months ended June 30, 1998.

Noninterest expense totaled $5.7 million for 1997 as compared with $5.3
million for 1996, an increase of $445,000. Personnel costs, which consists of
compensation and employee benefits, is the largest component of noninterest
expense. Personnel costs increased by $378,000 or 14.9% from $2.5 million in
1996 to $2.9 million in 1997. Increases in personnel

15
<PAGE>

costs related to the executive officer addition described in the preceding
paragraph, additional staffing to support continued growth, and increases in
the costs of employee benefits. Exclusive of personnel costs, noninterest
expense increased by 2.4% in 1997.

Noninterest expense totaled $5.3 million for 1996 as compared with $5.0
million for 1995, an increase of $289,000. Personnel costs increased by
$276,000 or 12.2%, with an increase of $252,000 in salary costs, due largely to
higher base salaries, additional staff and increased incentive pay providing
most of the increase. Increases in personnel costs related to the executive
officer addition described in the preceding paragraph, additional staffing to
support continued growth, and increases in the costs of employee benefits.
Exclusive of personnel costs, noninterest expense increased by only $13,000 in
1996.

PROVISION FOR INCOME TAXES

The provision for income taxes, as a percentage of income before income
taxes, was 31.1% and 31.1% for the six months ended June 30, 1998 and 1997,
respectively, and 31.3%, 30.5% and 20.3%, respectively, for the years ended
December 31, 1997, 1996 and 1995. In each period, the nontaxable investment
income has been the principal reason that the effective income tax rate has
been less than the statutory federal income tax rate of 34%.

FINANCIAL CONDITION

The Company's consolidated assets increased $8.3 million or 5.7% from
$145.7 million at December 31, 1997 to $154.0 million at June 30, 1998.
Investment securities available for sale and net loans receivable increased
$3.6 million and $3.6 million, respectively, while federal funds sold increased
$925,000. Deposits increased $11.1 million, providing funding both for the
growth in assets and for a decrease in borrowings of $3.5 million. Total
shareholders' equity increased from $12.5 million at December 31, 1997 to $13.3
million at June 30, 1998, principally due to net income of $657,000 during the
period.

Consolidated net assets increased $11.8 million or 8.8% during 1997, from
$133.9 million at the beginning of the year to $145.7 million at year end. An
increase of $12.3 million in deposits, together with net income of $1.2 million
and a decrease in investments of $1.4 million provided funding for growth in
net loans of $13.1 million and a reduction in borrowings of $1.8 million. Net
income of $1.2 million increased total shareholders' equity from $11.3 million
to $12.5 million during the year.

CAPITAL RESOURCES

Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The FDIC and the Federal Reserve, the primary
regulators of the Bank and the Company, respectively, have adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
expected to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with those guidelines. As shown in the
following table, both the Company and the Bank have maintained capital levels
exceeding minimum levels for "well capitalized" banks and bank holding
companies. See "Capitalization" and "Business -- Supervision and Regulation."

REGULATORY CAPITAL

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
---------- ----------- ---------- ----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated ........................ $14,103 13.93% $13,340 13.72% $12,100 14.15% $11,375
Bank ................................ 13,910 13.78% 13,215 13.64% 11,976 14.03% 11,109
Tier 1 capital to risk weighted assets
Consolidated ........................ 12,941 12.78% 12,215 12.57% 11,051 12.92% 10,400
Bank ................................ 12,748 12.63% 12,090 12.48% 10,926 12.80% 10,134
Tier 1 capital to average assets
Consolidated ........................ 12,941 8.57% 12,215 8.49% 11,051 8.33% 10,400
Bank ................................ 12,748 8.45% 12,090 8.40% 10,926 8.24% 10,134

<CAPTION>
DECEMBER 31,
------------
1995
-----------
PERCENT
-----------
<S> <C>
Total capital to risk weighted assets
Consolidated ........................ 14.42%
Bank ................................ 14.09%
Tier 1 capital to risk weighted assets
Consolidated ........................ 13.19%
Bank ................................ 12.85%
Tier 1 capital to average assets
Consolidated ........................ 8.78%
Bank ................................ 8.56%
</TABLE>

16
<PAGE>

LIQUIDITY

The Company's liquidity management objectives are to provide for deposit
withdrawals and maturing debt obligations, to provide a reliable source of
funding to borrowers, to fund operations on a cost effective basis, and to
capitalize on opportunities for expansion. Management believes that sufficient
resources are available to meet the Company's liquidity objectives through its
debt maturity structure, holdings of liquid assets, and access to additional
liquidity through a variety of funding vehicles.

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 funding for loans. The Company also has multiple funding sources that
can be used to increase liquidity and provide additional financial flexibility.
These sources consist primarily of established federal funds lines with
correspondent banks aggregating $13.5 million, the ability to borrow up to
$30.0 million from the Federal Home Loan Bank, access to borrowings from the
Federal Reserve Bank discount window, and the sale of securities under
agreements to repurchase. Total debt at June 30, 1998 aggregated $12.1 million,
as compared with $15.6 million and $17.4 million at December 31, 1997 and 1996,
respectively.

Management is not aware of any events that are reasonably likely to have a
material effect on the Company's liquidity, capital resources or operations.

INVESTMENT SECURITIES

Interest income from investment securities generally provides the second
largest source of income to the Company after interest on loans. The Board of
Directors has authorized investment in U.S. Government and agency securities,
state government obligations, municipal securities, obligations of the FHLB,
mortgage-backed securities issued by the Federal National Mortgage Association
("FNMA") and FHLMC and certain other securities authorized as permissible
investments under current regulations. The Company's objective is to use such
investments to reduce interest rate risk, enhance yields on assets, and provide
liquidity.

Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Company's
investment policy. The Company performs analyses on investment securities on an
ongoing basis to determine the impact on earnings and market value under
various interest rate and prepayment conditions. Securities purchases are
subject to the oversight of the Board of Directors and are reviewed on a
monthly basis. The executive officers of the Company have authority to make
specific investment decisions within the parameters determined by the Board of
Directors.

All of the Company's investment securities are classified as available for
sale and are presented in the financial statements at market value. The
following table sets forth the Company's investment securities portfolio at the
dates indicated.

INVESTMENT SECURITIES

<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
AT JUNE 30, 1998 1997
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- ---------- ---------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ........ $ 5,952 $ 5,972 5.74% $ 4,990 $ 5,010 5.96%
U.S. government agencies ........ 1,003 999 5.63% 1,004 993 5.47%
State and political
subdivisions ................... 5,155 5,501 6.29% 5,435 5,793 9.25%
Mortgage-backed securities ...... 13,776 13,940 6.89% 10,835 10,972 7.09%
FHLB and other stock ............ 1,059 1,081 7.02% 1,059 1,079 6.80%
------- ------- ---- ------- ------- ----
Total investment securities..... $26,945 $27,493 6.48% $23,323 $23,847 7.30%
======= ======= ==== ======= ======= ====

<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1996 1995
--------------------------------- --------------------------------
WEIGHTED WEIGHTED
AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- ---------- ---------- ----------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ........ $ 3,980 $ 3,999 6.40% $ 7,010 $ 7,104 5.81%
U.S. government agencies ........ 2,005 1,987 6.68% 2,008 2,017 6.22%
State and political
subdivisions ................... 5,491 5,819 9.32% 5,749 6,195 9.64%
Mortgage-backed securities ...... 12,025 12,104 6.67% 7,019 7,309 6.97%
FHLB and other stock ............ 1,304 1,311 5.96% 485 489 7.12%
------- ------- ---- ------- ------- ----
Total investment securities..... $24,805 $25,220 7.20% $22,271 $23,114 7.27%
======= ======= ==== ======= ======= ====
</TABLE>

17
<PAGE>

The following table sets forth the scheduled maturities, carrying values,
amortized cost and average yields for the Company's investment portfolio at
June 30, 1998.

INVESTMENT MATURITIES

<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------------------------------------
WITHIN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR TO FIVE YEARS TO TEN YEARS
------------------- ------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ---------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities .......... $3,962 5.60% $2,010 6.00% $ -- --
U.S. government agencies .......... -- -- 999 5.63% -- --
State and political subdivisions .. 77 6.75% 1,416 6.27% 4,008 6.29%
Mortgage-backed securities ........ -- -- 999 6.00% 7,232 6.50%
FHLB and other stock .............. -- -- -- -- -- --
------ ---- ------ ---- ------- ----
$4,039 5.62% $5,424 6.00% $11,240 6.43%
====== ==== ====== ==== ======= ====

<CAPTION>
AS OF JUNE 30,
-----------------------------------------
AFTER
TEN YEARS TOTAL
------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD
-------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
U.S. Treasury securities .......... $ -- -- $ 5,972 5.73%
U.S. government agencies .......... -- -- 999 5.63%
State and political subdivisions .. -- -- 5,501 6.29%
Mortgage-backed securities ........ 5,709 7.54% 13,940 6.89%
FHLB and other stock .............. 1,081 7.02% 1,081 7.02%
------ ---- ------- ----
$6,790 7.46% $27,493 6.48%
====== ==== ======= ====
</TABLE>

ASSET QUALITY

Management considers the Company's asset quality to be of primary
importance. The allowance for loan losses, which is utilized to absorb actual
losses in the loan portfolio, is maintained at a level sufficient to provide
for estimated potential charge-offs of non-collectible loans. The loan
portfolio is analyzed periodically in an effort to identify potential problems
before they actually occur. The Company's allowance for loan losses is also
analyzed quarterly by management. This analysis includes a methodology that
segments the loan portfolio by selected loan types and considers the current
status of the portfolio, historical charge-off experience, current levels of
delinquent, impaired and non-performing loans, as well as economic and inherent
risk factors. The provision for loan losses represents a charge against income
in an amount necessary to maintain the allowance at an appropriate level. The
monthly provision for loan losses may fluctuate based on the results of this
analysis. The following table depicts the allocation of the allowance for loan
losses at June 30, 1998 and at December 31, 1997, 1996, and 1995. The
allocation is based on management's grading of the loan portfolio with the
remaining portion allocated to the general category, although the entire
allowance is available to be used for write-offs in any category.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- ------------- -------- ------------- -------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT END OF PERIOD
APPLICABLE TO:
Real estate:
Construction ............ $ 22 2.98% $ 24 3.37% $ 23 3.68% $ 20 3.40%
Residential ............. 485 51.13% 473 51.60% 416 50.87% 392 51.12%
Commercial .............. 272 21.87% 270 21.14% 242 21.01% 260 20.99%
Commercial ............... 169 14.61% 136 13.75% 131 13.53% 102 13.17%
Consumer ................. 127 9.34% 121 10.05% 95 10.79% 96 11.27%
Other .................... 87 0.07% 101 0.09% 143 0.12% 105 0.05%
------ ------ ------ ------ ------ ------ ---- ------
Total allocation ....... $1,162 100.00% $1,125 100.00% $1,050 100.00% $975 100.00%
====== ====== ====== ====== ====== ====== ==== ======
</TABLE>

18
<PAGE>

The following table contains an analysis of the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type, for the
six-months ended June 30, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995.

SUMMARY OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period .................. $ 1,125 $ 1,050 $ 1,050 $ 975 $ 922
CHARGE-OFFS:
Real estate: .................................. 6 5 16 13 --
Commercial .................................... -- 12 54 2 --
Consumer ...................................... 49 27 70 60 60
Other ......................................... -- -- -- -- --
------- ------- ------- ------- -------
55 44 140 75 60
RECOVERIES:
Real estate: .................................. -- -- -- -- 6
Commercial .................................... -- -- -- -- 1
Consumer ...................................... 28 9 32 13 29
Other ......................................... -- -- -- -- --
------- ------- ------- ------- -------
28 9 32 13 36
Net charge-offs ............................... 27 35 108 62 24
Provision charged to operations ............... 64 85 183 137 77
------- ------- ------- ------- -------
Balance, end of period ........................ $ 1,162 $ 1,100 $ 1,125 $ 1,050 $ 975
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans ..... 0.04% 0.07% 0.09% 0.06% 0.03%
======= ======= ======= ======= =======
Ratio of allowance to year-end loans .......... 0.99% 1.01% 0.99% 1.04% 1.07%
======= ======= ======= ======= =======
</TABLE>

Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured loans, other real estate,
and other real estate under contract for sale. Loans are placed on non-accrual
when management has concerns relating to the ability to collect the loan
principal and interest, and generally when such loans are 90 days or more past
due. While non-performing assets represent potential losses to the Company,
management does not anticipate any aggregate material losses since most loans
are believed to be adequately secured. Management believes the allowance for
loan losses is sufficient to absorb known risks in the portfolio. No assurance
can be given that economic conditions will not
adversely affect borrowers and result in increased losses. The following table
summarizes non-performing assets by type at the dates indicated. Other than the
amounts listed, there were no other loans that (i) represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources or (ii)
represent material credits about which management has information that causes
them to have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.

SCHEDULE OF NON-PERFORMING ASSETS

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ---------------------
1998 1997 1996 1995
------------- ------ ------ -------
(IN
THOUSANDS)
<S> <C> <C> <C> <C>
Non-accrual loans ................................ $222 $323 $332 $180
Loans past due 90 days or more and still accruing 106 9 57 63
Other real estate ................................ 85 133 75 85
Renegotiated troubled debt ....................... -- -- -- --
---- ---- ---- ----
Total non-performing assets .................... $413 $465 $464 $328
==== ==== ==== ====
</TABLE>

19
<PAGE>

MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. The Company's objective
is to manage the mix of interest-sensitive assets and liabilities to moderate
interest rate risk and stabilize the net interest margin while enhancing
profitability.

ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT

A primary objective of interest rate sensitivity management is to ensure
the stability and quality of the Company's primary earning component, net
interest income. This process involves monitoring the Company's balance sheet
in order to determine the potential impact that changes in the interest rate
environment would have on net interest income. Rate sensitive assets and
liabilities have interest rates which are subject to change within a specific
time period, due to either maturity or contractual agreements that allow the
instruments to reprice prior to maturity. Interest rate sensitivity management
seeks to ensure that both assets and liabilities react to changes in interest
rates within a similar time period, thereby minimizing the risk to net interest
income. The measurement of the Company's interest rate sensitivity, or "gap,"
is a technique traditionally used in asset/liability management. Interest rate
"gap" analysis measures the relative dollar amounts of interest-earning assets
and interest-bearing liabilities which reprice within a specific time period,
either through maturity or rate adjustment. The "gap" is the difference between
the amounts of such assets and liabilities that are subject to repricing. A
"negative gap" for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amounts of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, a negative
gap would generally be expected, absent the effects of other factors, to result
in a lower decrease in the yield of assets relative to the cost of liabilities
with a positive effect on net interest income. Conversely, the cost of funds
for an institution with a negative gap would generally be expected to increase
more quickly than the yield on its assets in a rising interest rate
environment, and such institution's net interest income generally would be
expected to be adversely affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a "positive
gap."

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 which are projected
to reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Demand, money
market, NOW and savings accounts are assumed to be subject to immediate
repricing and depositor available and have been placed in the shortest period.
In making the gap computations, none of the assumptions sometimes made
regarding prepayment rates and deposit decay rates have been used for any
interest-earning assets or interest-bearing liabilities. In addition, the table
does not reflect scheduled principal repayments which will be received
throughout the lives of the loans. The interest rate sensitivity of the
Company's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience
differs from that indicated by such assumptions.

20
<PAGE>

INTEREST SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------
OVER THREE
THREE MONTHS
MONTHS THROUGH
OR LESS SIX MONTHS
------------ --------------
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
INTEREST-EARNING ASSETS:
Due from banks ....................................... $ 502 $ --
Federal funds sold ................................... 925 --
Investment securities ................................ -- 998
FHLB and other stock ................................. -- --
Variable rate loans .................................. 61,310 215
Fixed rate loans ..................................... 2,804 1,799
-------- --------
Total interest-earning assets ....................... 65,541 3,012
-------- --------
INTEREST-BEARING LIABILITIES:
Deposits ............................................. 70,214 13,003
Short-term borrowed funds ............................ 5,117 --
Long-term debt ....................................... 99 24
-------- --------
Total interest-bearing liabilities .................. 75,430 13,027
-------- --------
Interest sensitivity gap ............................. $ (9,889) $(10,015)
======== ========
Cumulative interest sensitivity gap .................. $ (9,889) $(19,904)
======== ========
Cumulative gap to total interest-earning assets ...... (15.09)% (29.03)%
======== ========
Cumulative rate sensitive assets to rate sensitive
liabilities ......................................... 86.89% 77.50%
======== ========

<CAPTION>
AT JUNE 30, 1998
----------------------------------------------------
OVER SIX OVER ONE NON-
MONTHS YEAR SENSITIVE
THROUGH THROUGH AND OVER
TWELVE FIVE FIVE
MONTHS YEARS YEARS TOTAL
-------------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Due from banks ....................................... $ -- $ -- $ -- $ 502
Federal funds sold ................................... -- -- -- 925
Investment securities ................................ 3,041 5,424 16,949 26,412
FHLB and other stock ................................. -- -- 1,081 1,081
Variable rate loans .................................. 1,143 416 -- 63,084
Fixed rate loans ..................................... 4,120 21,779 24,038 54,540
-------- ------- --------- ---------
Total interest-earning assets ....................... 8,304 27,619 42,068 146,544
-------- ------- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits ............................................. 14,368 6,990 7,292 111,867
Short-term borrowed funds ............................ -- -- -- 5,117
Long-term debt ....................................... 1,454 2,288 3,086 6,951
-------- ------- --------- ---------
Total interest-bearing liabilities .................. 15,822 9,278 10,378 123,935
-------- ------- --------- ---------
Interest sensitivity gap ............................. $ (7,518) $18,341 $ 31,690
======== ======= =========
Cumulative interest sensitivity gap .................. $(27,422) $(9,081) $ 22,609
======== ======= =========
Cumulative gap to total interest-earning assets ...... (35.68)% (8.69)% 15.43%
======== ======= =========
Cumulative rate sensitive assets to rate sensitive
liabilities ......................................... 73.70% 92.00% 118.24%
======== ======= =========
</TABLE>

In addition to the traditional gap analysis, the Company also uses a
computer based interest rate risk simulation model. This comprehensive model
includes rate sensitivity gap analysis, rate shock net interest margin
analysis, and asset/liability term and rate analysis. The Company uses this
model to periodically monitor interest rate risk and to detect trends that may
affect overall interest income. As a result, this analysis more accurately
predicts the risk to net interest income over the upcoming twelve month period.
The Company has a policy establishing the maximum allowable risk to net
interest income caused by changes in interest rates. The modeling results
indicate that the Company is within the established parameters of the interest
rate risk policy.

Interest rate risk management and liquidity management are both a part of
the Company's overall asset/liability management process. The primary oversight
of asset/liability management rests with the Company's Asset Liability
Management Committee, which is comprised of members of executive and senior
management of the Company and the Bank. The committee meets on a regular basis
to review asset liability management activities of the Company and monitor
compliance with established policies. The committee reports activities to the
Board of Directors on a regular basis.

ACCOUNTING AND REGULATORY MATTERS

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

IMPACT OF INFLATION AND CHANGING PRICES

Inflation affects financial institutions in ways that are different from
most commercial and industrial companies, which have significant investments in
fixed assets and inventories. The effect of inflation on interest rates can
materially impact bank operations, which rely on net interest margins as a
major source of earnings. Noninterest expenses, such as salaries and wages,
occupancy and equipment cost are also negatively impacted by inflation.

21
<PAGE>

YEAR 2000 COMPLIANCE

The "Year 2000" issue confronting the Company and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the Year 2000. Many existing computer programs
and systems were originally programmed with six digit dates that provided only
two digits to identify the calendar year in the date field, without considering
the upcoming change in the century. With the impending new millennium, these
programs and computers will recognize "00" as the year 1900 rather than the
year 2000. Like most financial service providers, the Company and its
operations may be significantly affected by the Year 2000 issue due to its
dependence on computer generated financial information. Software, hardware, and
equipment both within and outside the Company's direct control and with whom
the Company electronically or operationally interfaces (e.g. third party
vendors providing data processing, information system management, maintenance
of computer systems, and credit bureau information) are likely to be affected.
Furthermore, if computer systems are not adequately changed to identify the
Year 2000, many computer applications could fail or create erroneous results.
As a result, many calculations which rely on date field information, such as
interest, payment or due dates and other operating functions, could generate
results which are significantly misstated, and the Company could experience a
temporary inability to process transactions, prepare statements or engage in
similar normal business activities. In addition, under certain circumstances,
failure to adequately address the Year 2000 issue could adversely affect the
viability of the Company's suppliers and creditors and the creditworthiness of
its borrowers. Thus, if not adequately addressed, the Year 2000 matter could
result in a significant adverse impact on products, services and the
competitive condition of the Company.

Financial institution regulators have recently increased their focus upon
Year 2000 compliance issues, issuing guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Year
2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the Year 2000 implications of
reliance on vendors, data exchange and potential impact on customers, suppliers
and borrowers. These statements also require each federally regulated financial
institution to survey its exposure, measure its risk and prepare a plan in
order to solve the Year 2000 issue. In addition, the federal banking regulators
have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Year
2000 problems. The federal banking agencies have asserted that Year 2000
testing and certification is a key safety and soundness issue in conjunction
with regulatory exams, and thus an institution's failure to address
appropriately the Year 2000 issue could result in supervisory action, including
such enforcement actions as the reduction of the institution's supervisory
ratings, the denial of applications for approval of a merger or acquisition, or
the imposition of civil money penalties.

In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000, assess their potential impact on operations, monitor
the progress of third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for any
critical systems which are not effectively reprogrammed. The plan is divided
into the five phases: (1) awareness, (2) assessment, (3) renovations, (4)
validation, and (5) implementation.

The Company has substantially completed the first two phases of the plan
and is currently working internally and with external vendors on the final
three phases. Because the Company outsources its item processing operations to
a service provider which is jointly owned with another bank, the Company's Year
2000 compliance is being closely coordinated with that of the service provider.

The Company does not currently expect that the cost of its Year 2000
compliance program will be material to its financial condition or results of
operations, and expects that it will satisfy such compliance program without
material disruption of its operations. In the event that the Company's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's business, results of operations or financial
condition could be adversely affected.

22
<PAGE>

BUSINESS

GENERAL

The Company was incorporated under the laws of the State of North Carolina
as a bank holding company for the Bank. The Company commenced operations on
July 1, 1993. The Bank was incorporated under the laws of the State of North
Carolina on September 28, 1983. It commenced operations on January 26, 1984.

Since commencement of operations, the Bank has engaged in the retail and
commercial banking business. The Bank has three banking offices in the city of
Albemarle, one office in the town of Norwood, and one office in the town of
Oakboro, Stanly County, North Carolina. The Bank conducts a general banking
business through its five offices.

Its depository services include personal and commercial checking, savings,
money market, certificates of deposit accounts and individual retirement
accounts tailored to meet customers' needs. The Bank provides fixed and
variable rate loans which include mortgage, home equity lines of credit,
consumer and commercial loans, and other lines of credit for both consumer and
commercial customers. The Bank also offers MasterCard(R) credit cards.

A new service offered by the Bank during 1997 was 24 Hour Telephone
Banking, providing customers the convenience and access to account information,
rate information and accessibility of funds transfers between accounts. Another
service offered is a Visa Check Card which functions as a point-of-sale (POS)
and automated teller machine (ATM) card. Customers can use the Check Card for
purchases at any merchant accepting Visa and at any ATM displaying the HONOR
and CIRRUS networks regionally and worldwide, respectively. Other services
include rental of safe deposit boxes, night depository, wire transfers,
incoming and outgoing collection items, notary service, check safekeeping, and
direct deposit.

The Bank has two wholly-owned subsidiaries, Strategic Alliance and BOS
Agency which provide investment management and insurance products for the
Bank's customers through the Bank's branch network. Strategic Alliance is a
broker-dealer through the NASD offering a full range of financial and
investment planning services. BOS Agency is a corporate entity that recognizes
the risk management needs of customers and brings life insurance, long-term
health care, Medicare supplement and other insurance industry products to
customers' financial portfolios.

At June 30, 1998, the Bank, through a joint venture agreement with another
community bank, had a 50 percent ownership interest in CDS, a company that
provides operations and data processing services.

MARKET AREAS

The Company's primary market area is the Uwharrie Lakes Region, which
consists of the Stanly, Montgomery, Richmond, Anson, Union, Cabarrus, Randolph
and Davidson Counties. The region is unified by the Yadkin/Pee Dee River
System, which runs north to south and serves as a common border for six of the
area's counties. At the region's center, the Uwharrie River joins the Yadkin to
become the Pee Dee. Once free flowing, the river was dammed to provide
electrical power for a growing industrial base. Six reservoirs were created in
the river system to create a source of drinking water and electrical power for
the region. Next to the river, the most distinguishing physical feature of the
region is the ancient Uwharrie Mountains chain. As remnants of a prehistoric
volcanic mountain range, the Uwharries form part of the Carolina Slate Belt.
The gravel and quarrying industries make up a large part of the regional
economy today.

The Uwharrie Lakes Region developed as a land of small farms and rural
hamlets, with Salisbury in Rowan County being the largest market town of note.
The exception was Anson County, which was more suitable for large scale
farming.

Toward the end of the nineteenth century, industrialization emerged in the
Region with the growth of textile mills and railroads. With the abundance of
water power and lower wage workers, the Region became the home for many
industrial enterprises, including textiles, furniture, aluminum, and rock and
quarry mining. While agriculture continues to play an important role in the
Region, manufacturing has become the backbone of the economy.

The Uwharrie Lakes Region has a wide range of recreational resources,
including water activities, a national forest, two state parks, a national
wildlife refuge, and a state owned game refuge. Tourism has become a
significant part of the Region's economy, generating more than $295 million
annually. It is anticipated that tourism will continue to grow in the area with
the building of Interstate 73/74 through Montgomery County which will provide a
new gateway into the Uwharrie Lakes Region.

As a result of the Region's lower cost of living and lower crime rate, the
Region has a large number of residents commuting outside the area to work in
large metropolitan-area jobs. Many people working in Charlotte and the Piedmont
Triad are moving to the Uwharrie Lakes Region to enjoy less congested
environments and to take advantage of more favorable

23
<PAGE>

tax rates. It is anticipated that continued growth in the large metropolitan
areas will continue to spill over to the Uwharrie Lakes Region and stimulate
growth in the area.

According to National Decision Systems, the Uwharrie Lakes Region
experienced an 11.22% growth in population from 1980 to 1990 to more than
670,000 residents. In 1990, there were more than 250,000 households in the
Region, which represented a 19.36% growth from the 1980 Census. In 1997, the
Region's median household income was $33,129 and average household income was
$45,487. Approximately 37% of the population was urban and 63% was rural. By
the Year 2002, National Decision Systems projects a total population in the
Region of approximately 800,000 and more than 300,000 households.

Management is focused on the growth prospects for the Uwharrie Lakes
Region and the opportunity to expand the Company's delivery of financial
services in the Region. While there are no specific plans to open new branches
at this time, the Company's Strategic Plan contemplates the expansion of its
presence in the Region.

LENDING ACTIVITIES

GENERAL. The Bank offers a broad array of lending services, including real
estate, commercial and consumer loans, to individuals and small to medium-sized
businesses and other organizations that are located in or conduct a substantial
portion of their business in the Bank's market areas. The Bank provides fixed
and variable rate loans which include mortgage, home equity lines of credit,
consumer and commercial loans, and other lines of credit for its consumer and
commercial customers. The Bank's net loans at June 30, 1998 were $116.5
million, or 80.1% of total earning assets.

LOAN COMPOSITION. The following tables set forth, at the dates indicated,
the composition of the Bank's loan portfolio and the related percentage
composition, and contractual loan maturities.

LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
AT JUNE 30, 1998 1997
------------------------- -------------------------
PERCENT OF PERCENT OF
AMOUNT NET LOANS AMOUNT NET LOANS
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Real estate:
Construction ................. $ 3,506 3.01% $ 3,840 3.40%
Residential .................. 60,142 51.64% 58,825 52.12%
Commercial ................... 25,728 22.09% 24,102 21.36%
-------- ------ -------- ------
Total real estate .......... 89,376 76.74% 86,767 76.88%
-------- ------ -------- ------
Other:
Commercial ................... 17,190 14.76% 15,674 13.89%
Consumer ..................... 10,987 9.43% 11,452 10.15%
Other ........................ 72 0.07% 100 0.08%
-------- ------ -------- ------
Total other loans .......... 28.249% 24.26% 27.226% 24.12%
-------- ------ -------- ------
Total loans ................ 117,625 101.00% 113,993 101.00%
Less:
Allowance for loan losses ..... 1,162 1.00% 1,125 1.00%
Deferred loan fees, net ....... -- -- 8 --
-------- ------ -------- ------
Net loans .................. $116,463 100.00% $112,860 100.00%
======== ====== ======== ======

<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1996 1995
------------------------- ------------------------
PERCENT OF PERCENT OF
AMOUNT NET LOANS AMOUNT NET LOANS
------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Real estate:
Construction ................. $ 3,716 3.72% $ 3,097 3.44%
Residential .................. 51,321 51.42% 46,499 51.68%
Commercial ................... 21,201 21.24% 19,089 21.22%
--------- ------ --------- ------
Total real estate .......... 76,238 76.39% 68,685 76.34%
--------- ------ --------- ------
Other:
Commercial ................... 13,647 13.67% 11,976 13.31%
Consumer ..................... 10,890 10.91% 10,252 11.39%
Other ........................ 112 0.12% 51 0.06%
--------- ------ --------- ------
Total other loans .......... 24.649% 24.70% 22.279% 24.76%
--------- ------ --------- ------
Total loans ................ 100,887 101.09% 90,964 101.10%
Less:
Allowance for loan losses ..... 1,050 1.05% 975 1.08%
Deferred loan fees, net ....... 34 0.04% 16 0.02%
--------- ------ --------- ------
Net loans .................. $ 99,803 100.00% $ 89,973 100.00%
========= ====== ========= ======
</TABLE>

24
<PAGE>

CONTRACTUAL LOAN MATURITIES

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------------------------------------
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
-------------------------------------------- -----------------------
PREDETER-
ONE OVER ONE OVER MINED FLOATING OR
YEAR OR YEAR TO FIVE INTEREST ADJUSTABLE
LESS FIVE YEARS YEARS TOTAL RATES RATES
--------- ------------ --------- ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
Construction ......... $ 2,337 $ 786 $ 383 $ 3,506 $ 1,008 $ 2,498
Residential .......... 4,508 16,293 39,341 60,142 33,390 26,752
Commercial ........... 3,392 13,086 9,250 25,728 11,048 14,680
Commercial ............ 7,246 7,900 2,044 17,190 3,829 13,361
Consumer .............. 4,125 6,197 665 10,987 5,265 5,722
Other ................. 71 -- -- 71 -- 71
------- ------- ------- -------- ------- -------
$21,679 $44,262 $51,683 $117,624 $54,540 $63,084
======= ======= ======= ======== ======= =======
</TABLE>

LOAN ORIGINATION. The Bank generally has authority to originate loans
secured by real estate located throughout its general trade area. Consistent
with its emphasis on being a community-oriented financial institution, the Bank
concentrates its lending activities in its market area. The Bank's loan
originations are derived from a number of sources, including referrals from
depositors and borrowers, repeat customers, advertising, and calling officers
as well as walk-in customers. The Bank's solicitation programs consist of
advertisements in the local media, in addition to participation in various
community organizations and events. Real estate loans are originated by the
Bank's loan personnel. All of the Bank's loan personnel are salaried and the
Bank generally does not compensate loan personnel on a commission basis for
loans originated. Loan applications generally are accepted at the Bank's
offices.

LOAN UNDERWRITING POLICIES. The Bank's lending activities are subject to
written, non-discriminatory underwriting standards and to loan origination
procedures prescribed by the Board of Directors. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements, and confirmations. Individual officers of the Bank based
on their experience level, and an Internal Loan Committee designated by the
Board of Directors, have been granted credit authority by the Board of
Directors to approve loans up to varying specified dollar amounts, depending
upon the type of loan. These authorities are based on aggregate borrowings of
an individual or entity. On a periodic basis, the full Board of Directors
reviews lending activity for the prior period, and acts on the recommendations
of its Loan Committee to approve all loans or loan relationships in excess of
$500,000. The Chief Executive Officer has veto power on any loan request.

Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of the Federal National Mortgage
Association ("FNMA"). Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income, and credit
standing. If a proposed loan is to be secured by a mortgage on real estate, an
appraisal of the real estate is usually undertaken either by an appraiser
approved by the Bank and licensed by the State of North Carolina or by
qualified Bank personnel. In the case of single-family residential mortgage
loans, except when the Bank becomes aware of a particular risk of environmental
contamination, the Bank generally does not obtain a formal environmental report
on the real estate at the time a loan is made. A formal environmental report
may be required in connection with nonresidential real estate loans.

It is the Bank's policy to record a lien on the real estate securing a
loan. Borrowers must also obtain hazard insurance policies prior to closing
and, when the property is in a flood plain as designated by the United States
Department of Housing and Urban Development, pay flood insurance policy
premiums.

With respect to single-family residential mortgage loans, the Bank makes a
loan commitment of between 30 and 90 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. The interest rate is guaranteed for the
commitment period.

The Bank typically lends up to 80% of the lesser of the appraised value or
the purchase price of the real property securing a mortgage loan. However, if
the amount of a residential loan originated or refinanced exceeds 80% of the
appraised value, the Bank's policy generally is to obtain private mortgage
insurance at the borrower's expense on that portion of the principal amount of
the loan that exceeds 80% of the appraised value of the property. The Bank will
make a single-family

25
<PAGE>

residential mortgage loan with up to a 100% loan-to-value ratio for qualifying
first time home buyers or if the required private mortgage insurance is
obtained. The Bank generally limits the loan-to-value ratio on commercial real
estate mortgage loans to 75%.

Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds
available for lending purposes. These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies, and government budgetary
matters.

REAL ESTATE LOANS. Loans secured by real estate, for several purposes,
constituted $89 million, or 76%, of the Bank's total loans at June 30, 1998,
and of that amount, $60 million, or 51% of the Bank's total loans at that time
were secured by 1-to-4 family residences. This high concentration of real
estate loans can be attributed to the rural character of the Bank's primary
service area, and management's efforts to meet that area's lending demands in a
prudent manner. It is the policy of the Bank that all loans secured by real
estate be supported by an accurate appraisal.

Commercial real estate loan terms are typically limited to 10 years.
Interest rates may be fixed or adjustable, based on market conditions, and the
Bank generally charges an origination fee. Management has attempted to reduce
credit risk in the commercial real estate portfolio by promulgating reasonable
underwriting guidelines that allow for only qualified exceptions including
requiring a loan to value ratio of 75% or less. The Bank also often requires
personal guarantees of the principal owners of the property and obtains
personal financial statements of the principal owners in such cases.

Although the Bank's loan portfolio is diversified, there is a
concentration of mortgage real estate loans, primarily one to four family
residential mortgage loans. Loans are typically written with terms of up to 30
years underwritten to conform to "secondary market" requirements or the
approval of management. Rates may be fixed or variable, and the Bank typically
charges an origination fee. The Bank attempts to minimize credit risk by
requiring a loan to value ratio of 80% or less. The Bank has experienced
minimal loan losses on residential real estate over the past ten years. The
Bank also originates residential loans for sale into the secondary market, but
maintains the servicing of those loans after their sale and subsequent
securitization.

The Bank also makes loans secured by farmland for a variety of purposes
ranging from short term working capital to finance crop production, to finance
land and/or capital improvements, and to finance equipment. The maximum loan
amount secured by farmland is 66% of the cash selling price or appraised value,
whichever is less, unless approved by management.

COMMERCIAL LOANS. The Bank makes loans for commercial purposes in various
lines of businesses. At June 30, 1998, the Bank held $17 million of commercial
loans, or 15% of its total loan portfolio. Equipment loans are typically made
on terms up to 5 years at fixed or variable rates, with the financed equipment
pledged as collateral to the Bank. The Bank attempts to reduce its credit risk
on these loans by limiting the loan to value ratio to no more than 65%. Working
capital loans are made on terms typically not exceeding one year, and these
loans may be secured or unsecured.

CONSUMER LOANS. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment
and term loans originated directly by the Bank, and unsecured revolving lines
of credit. Certain of the direct loans are secured by the borrower's residence,
but the Bank attempts to underwrite the credit independent of the collateral
value. At June 30, 1998, the Bank held $11 million of consumer loans.

CREDIT CARD LOANS. The Bank issues charge cards to its credit-worthy
customers at lines of credit on regular charge cards ranging from $500 to
$10,000, and on gold cards generally ranging from $5,000 to $50,000 based on
the customer's qualifications. Regular cards are issued with tiered fixed
rates, and gold cards are issued with tiered variable rates.

OUTSOURCING OF CERTAIN OPERATIONAL FUNCTIONS Corporate Data Services, Inc.
("CDS"), a North Carolina corporation located in Asheboro, North Carolina, in
which the Bank, at June 30, 1998, through a joint venture agreement with
another community bank, had a fifty percent (50%) ownership interest provides
operations and data processing services for the Bank and for other community
banks in North Carolina.

DEPOSITS

Deposits are a primary source of the Bank's funds for lending, investment
activities, and general operational purposes. In addition to deposits, the Bank
derives funds from loan principal and interest repayments, maturities of
investment securities, and interest payments thereon. Although loan repayments
are a relatively stable source of funds, deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings from the Federal Home Loan Bank of Atlanta may be used on a
short-term basis to compensate for reductions in the availability of funds, or

26
<PAGE>

on a longer term basis for general operational purposes. The Bank attracts
deposits principally from within its market area by offering a variety of
deposit instruments, including, money market accounts, passbook savings
accounts, individual retirement accounts, and certificates of deposit which
typically range in maturity from 7 days to 4 years. Deposit terms vary
according to the minimum balance required, the length of time the funds must
remain on deposit, and the interest rate. Maturities, terms, service fees, and
withdrawal penalties for its deposit accounts are established by the Bank on a
periodic basis. The Bank reviews its deposit pricing on a weekly basis. In
determining the characteristics of its deposit accounts, the Bank considers the
rates offered by competing institutions, lending and liquidity requirements,
growth goals and federal regulations. Management believes it prices its
deposits comparably to rates offered by its competitors. The Bank does not
accept brokered deposits.

The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff, and convenient hours of service. Substantially all of the
Bank's depositors are North Carolina residents.

The following tables set forth the mix of the depository accounts offered
by the Bank as a percentage of total deposits at the dates indicated.

DEPOSIT ANALYSIS

<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
AT JUNE 30, 1998 1997
---------------------------------- ----------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS COST AMOUNT DEPOSITS COST
---------- ------------ ---------- ---------- ------------ ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ............. $ 16,109 12.59% -- $ 13,871 11.87% --
Money market and
NOW accounts ............... 28,123 21.98% 2.33% 28,569 24.44% 2.31%
Savings ..................... 33,669 26.31% 4.02% 31,871 27.26% 4.13%
Time deposits,
$100,000 and over........... 16,898 13.20% 5.33% 9,046 7.74% 5.39%
Other time deposits ......... 33,176 25.92% 5.14% 33,548 28.70% 5.16%
-------- ------ ---- -------- ------ ----
Total deposits ........... $127,975 100.00% 3.61% $116,905 100.00% 3.59%
======== ====== ==== ======== ====== ====

<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1996 1995
---------------------------------- ---------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS COST AMOUNT DEPOSITS COST
---------- ------------ ---------- ---------- ------------ ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ............. $ 12,852 12.29% -- $10,183 10.63% --
Money market and
NOW accounts ............... 24,112 23.05% 1.84% 23,274 24.30% 2.11%
Savings ..................... 27,707 26.49% 4.05% 24,494 25.57% 4.28%
Time deposits,
$100,000 and over........... 6,503 6.22% 5.36% 5,190 5.42% 5.66%
Other time deposits ......... 33,425 31.96% 5.19% 32,653 34.09% 5.47%
-------- ------ ---- ------- ------ ----
Total deposits ........... $104,599 100.00% 3.49% $95,794 100.00% 3.78%
======== ====== ==== ======= ====== ====
</TABLE>

27
<PAGE>

OTHER FUNDING SOURCES

Short-term borrowed funds consist of federal funds purchased, securities
sold under agreements to repurchase, master notes, and advances from the FHLB
with original maturities of less than one year. The following table summarizes
balance and rate information for short-term borrowed funds as of the dates and
for the periods indicated:

<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS
AT OR FOR THE YEAR ENDED DECEMBER
ENDED JUNE 30, 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
AMOUNTS OUTSTANDING AT END OF PERIOD:
SHORT-TERM BORROWED FUNDS
Federal funds purchased:
Amount ........................................ $ -- $ 935 $ 1,400 $ -- $ 2,850
Weighted average rate ......................... --% 6.63% 8.00% --% 6.50%
Securities sold under agreement to repurchase:
Amount ........................................ $3,778 $3,882 $ 4,047 $8,156 $ 4,462
Weighted average rate ......................... 4.37% 4.34% 4.46% 4.16% 4.45%
Master notes:
Amount ........................................ $1,339 $ 239 $ 2,562 $ -- $ --
Weighted average rate ......................... 4.39% 4.39% 4.42% --% --%
Advances from the Federal Home Loan Bank:
Amount ........................................ $ -- $3,800 $ -- $3,000 $ --
Weighted average rate ......................... --% 6.48% --% 5.45% --%
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END
SHORT-TERM BORROWED FUNDS
Federal funds purchased ........................ $2,175 $5,725 $ 5,725 $4,675 $ 4,225
Securities sold under agreement to repurchase .. 4,801 5,299 5,999 8,156 4,462
Master notes ................................... 2,352 239 2,659 -- --
Advances from the Federal Home Loan Bank ....... 2,500 8,400 8,400 3,000 --
AVERAGES DURING THE PERIOD:
SHORT-TERM BORROWED FUNDS
Federal funds purchased:
Average balance ............................... $1,131 $1,190 $ 1,059 $1,556 $ 1,656
Weighted average rate ......................... 5.98% 5.77% 5.92% 5.68% 6.08%
Securities sold under agreement to repurchase:
Average balance ............................... $3,877 $4,831 $ 4,553 $5,764 $ 3,672
Weighted average rate ......................... 4.46% 4.22% 4.24% 4.46% 5.16%
Master notes:
Average balance ............................... $1,725 $ 95 $ 908 $ -- $ --
Weighted average rate ......................... 0.04% 4.52% 4.36% --% --%
Advances from the Federal Home Loan Bank:
Average balance ............................... $1,194 $3,149 $ 2,415 $ 867 $ 405
Weighted average rate ......................... 5.75% 5.60% 5.65% 5.66% 6.17%
</TABLE>

Long-term debt consists of advances from the FHLB with original maturities
of one year or more, and aggregated $7.0 million, $7.6 million and $6.3 million
at June 30, 1998 and at December 31, 1997 and 1996, respectively. Pursuant to
collateral agreements with the FHLB, advances are collateralized by all of the
Company's stock in the FHLB of Atlanta and its qualifying first mortgage loans.
Total credit available from the FHLB and other banks for short-term and
long-term borrowings was $43.5 million at June 30, 1998.

28
<PAGE>

INVESTMENT SERVICES

The Bank has two wholly-owned subsidiaries, BOS Agency and Strategic
Alliance, which provide its customers with investment and insurance services
and products, and further the Company's role as an independent financial
services institution. Both subsidiaries share employees, equipment, and the
same location, but are operated as separate corporate entities.

BOS Agency was formed in 1987 and sells various insurance products to
individuals and small businesses, including fixed annuities, traditional life
insurance for individuals, long-term care, disability, key man coverages,
deferred compensation packages, and Medicare supplements. BOS Agency provides
insurance products underwritten only by the nation's most respected and
well-recognized insurance providers, all of which have, in addition, met
certain minimum criteria set forth by BOS Agency, including, TransAmerica, Paul
Revere, John Hancock, and Lincoln Benefit Life.

Strategic Alliance, formed in 1989, evolved in response to the growing
number of aging "baby boomers" requiring investment advice and services.
Strategic Alliance is a member of the National Association of Securities
Dealers, Inc. as a securities broker-dealer that offers a full range of
financial and investment planning services to its customers. Nine of its
employees are registered investment advisors with the SEC, and Strategic
Alliance serves individuals and small businesses ranging from ten to up to 700
employees. Strategic Alliance also manages numerous individual retirement
plans.

MARKETING

The Bank and its subsidiaries currently market their services through
advertising campaigns and in printed materials, such as newspapers, magazines
and direct mailings, as well as through promotional items, such as caps, pens,
pencils and shirts. Officers of the Company and the Bank and its subsidiaries
are also heavily involved in local civic affairs and philanthropic
organizations in order to focus customers on products and services on a
personal level, and to emphasize the Company's focus on its community.

COMPETITION

Commercial banking in North Carolina is extremely competitive, due in
large part to statewide branching. Currently, many of the Bank's competitors
are significantly larger and have greater resources than the Bank. The Bank
continues to encounter significant competition from a number of sources,
including bank holding companies, commercial banks, thrift institutions, credit
unions, and other financial institutions and financial intermediaries. Among
commercial banks, the Bank competes in its market areas with some of the
largest banking organizations in the State, several of which have hundreds of
branches in North Carolina. Competition with the Bank is not limited to
financial institutions based in North Carolina. The enactment of federal
legislation authorizing nationwide interstate banking has greatly increased the
size and financial resources of some of the Bank's competitors. Consequently,
many of the Bank's competitors have substantially higher lending limits due to
their greater total capitalization. As a result of the interstate banking
legislation, the Bank's market is open to future penetration by banks located
in other states provided the other state allows acquisitions of its banking
institutions by North Carolina banking institutions, thereby increasing
competition. To date, there is interstate branching among banks in North
Carolina, Virginia, South Carolina and Tennessee.

PROPERTIES

The Bank owns all of its banking offices, except for a small portion of
the Main Office leased from the City of Albemarle since 1984, at $1,136 per
month with renewal options extending through September 2003. The Bank's Main
Office also consists of an adjoining building purchased in 1991, which contains
additional administrative offices of the Company and the Bank. The Bank
purchased a commercial building and parking lot adjacent to its Main Office in
Albemarle in 1988 and holds this property for future expansion purposes.

The headquarters of Strategic Alliance is located in a facility leased by
the Company from Paramount Construction, Inc. of Albemarle, North Carolina, for
$2,000 per month under a five-year lease with three five-year renewal options
and an option to purchase. The Company sub-leases part of this building to a
local non-profit corporation in addition to Strategic Alliance.

29
<PAGE>

The Company's locations are listed in the table below:

<TABLE>
<CAPTION>
LOCATION YEAR OPENED
- ---------------------------------------------- ------------
<S> <C>
Main Office and Investment Services Center 1984
167 North Second Street
Post Office Box 338
Albemarle, NC 28002-0338
1984
Village Office
710 North First Street
Post Office Box 338
Albemarle, NC 28002-0338
1988
East Albemarle Office
800 Highway 24-27 Bypass
Post Office Box 338
Albemarle, NC 28002-0338
1987
Norwood Office
107 South Main Street
Post Office Box 657
Norwood, NC 28128-0657
1993
Oakboro Office
624 North Main Street
Post Office Box 539
Oakboro, NC 28129-0539
1989
Strategic Alliance/BOS Agency
132 North First Street
Post Office Box 1517
Albemarle, NC 28002-1517
</TABLE>

All of the Bank's existing facilities are freestanding, fully equipped and
have adequate parking and drive-up banking facilities, except for the Main
Office which does not have a drive-up facility. The East Albemarle Office
provides an ATM machine, and other ATMs will be installed in 1998 at the
Village Office and the Norwood Office.

EMPLOYEES

As of June 30, 1998, the Company had approximately 64 full-time and 31
part-time employees. None of the employees of the Company are represented by
any collective bargaining unit. The Company considers its relations with its
employees to be excellent.

LEGAL PROCEEDINGS

In the ordinary course of operations, the Company is a party to various
legal proceedings. In the opinion of management, there is no proceeding
pending, or to the knowledge of management threatened, in which an adverse
decision could result in a material adverse change in the business or results
of operations of the Company.

SUPERVISION AND REGULATION OF THE COMPANY

As a bank holding company, the Company is subject to the supervision,
examination and reporting requirements contained in the Bank Holding Company
Act of 1956 (the "BHCA") and the regulations of the Federal Reserve. The
Company's subsidiary is organized as a North Carolina-chartered commercial bank
and is subject to the supervision, examination and reporting requirements of
the Commissioner of Banks of the State of North Carolina (the "Commissioner")
and the North Carolina State Banking Commission (the "Banking Commission") and
the FDIC. The following discussion sets forth certain of the material elements
of the regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to the Company.
This regulatory framework is intended primarily for the protection of
depositors and the federal deposit insurance funds and not for the protection
of security holders. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy may have a material
effect on the business of the Company.

30
<PAGE>

GENERAL. As a bank holding company, the Company is subject to the
supervision, examination and reporting requirements contained in the BHCA and
the regulations of the Federal Reserve. The Bank is organized as a
state-chartered commercial bank and is subject to the supervision, examination
and reporting requirements of the Commissioner and the FDIC.

Under the BHCA, bank holding companies may not directly or indirectly
acquire the ownership or control of more than five percent of the voting shares
or substantially all of the assets of any company, including a bank, without
the prior approval of, or a waiver of the requirement for such approval by, the
Federal Reserve.

In addition, the Company's activities, and those of companies which it
controls or in which it holds more than five percent of the voting stock, are
limited to banking or managing or controlling banks or furnishing services to
or performing services for its subsidiaries, or any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the Federal Reserve must consider whether
the performance of such an activity can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. For example, banking, operating a thrift
institution, acquiring or servicing loans, leasing personal property,
conducting discount securities brokerage activities, performing certain data
processing services, acting as agent or broker in selling credit life insurance
and certain other types of insurance in connection with credit transactions and
certain insurance underwriting activities have all been determined by the
Federal Reserve to be permissible activities.

The Federal Reserve has the authority to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law
and to take certain remedial action. In particular, the Federal Reserve has the
power to order a holding company or its subsidiaries to terminate any activity
or terminate its ownership or control of any subsidiary, despite prior approval
of such activity or such ownership or control, when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that bank holding company.

The Company is also subject to the North Carolina Bank Holding Company Act
of 1984 ("NCBHCA"). This statute prohibits bank holding companies from
acquiring or controlling certain non-bank banking institutions (for example,
institutions which accept deposits but do not make commercial loans) which have
offices in North Carolina. As required by the NCBHCA, the Company, by virtue of
its ownership of the Bank, has registered as a bank holding company with the
Commissioner.

DIVIDENDS. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board pursuant to FDICIA, the
Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."

Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
retained earnings. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.

BORROWINGS. There are also various legal restrictions on the extent to
which the Company can borrow or otherwise obtain credit from the Bank. In
general, these restrictions require that any such extensions of credit must be
secured by designated amounts of specified collateral and are limited, as to
the Company, to ten percent of the Bank's capital stock and surplus.

Under Federal Reserve policy, the Company is expected to act as a source
of financial strength to the Bank and to commit resources to support such
subsidiary. This support may be required at times when, absent such Federal
Reserve policy, the Company may not find itself willing or able to provide it.

Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy,

31
<PAGE>

any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.

CAPITAL ADEQUACY. The Federal Reserve, and the FDIC have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Under these risk-based capital standards, the minimum
consolidated ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) is 8%. At
least half of the total capital is to be composed of common stockholders'
equity, retained earnings, a limited amount of qualifying perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill and certain intangibles ("Tier I Capital" and,
together with Tier 2 Capital, "Total Capital"). The remainder of Total Capital
may consist of mandatory convertible debt securities and a limited amount of
subordinated debt, qualifying preferred stock and loan loss allowance ("Tier 2
Capital"). At June 30, 1998, the Company's Tier I and Total Capital ratios were
12.78% and 13.93%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier I Capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent. The
Company's Leverage Ratio at June 30, 1998, was 8.57%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible Tier I Leverage Ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve has not advised the Company of any specific
minimum Leverage Ratio or tangible Tier I Leverage Ratio applicable to it.

The Bank is subject to similar capital requirements adopted by the FDIC.
The Bank had a Leverage Ratio of 8.45% as of June 30, 1998. The federal banking
agencies have not advised the Bank of any specific minimum Leverage Ratio
applicable to it.

PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Act, as amended
(the "FDIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. The FDIA establishes five capital tiers:
"well capitalized"; "adequately capitalized"; "undercapitalized";
"significantly undercapitalized"; and "critically undercapitalized". A
depository institution's capital tier will depend upon how its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.

The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to
FDIC-insured banks. The relevant capital measures are the Total Capital Ratio,
Tier I Capital Ratio and the Leverage Ratio. Under the regulations, a
FDIC-insured bank will be (i) "well capitalized" if it has a Total Capital
Ratio of ten percent or greater, a Tier I Capital Ratio of six percent or
greater and a Leverage Ratio of five percent or greater and is not subject to
any order or written directive by the FDIC to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has
a Total Capital Ratio of eight percent or greater, a Tier I Capital Ratio of
four percent or greater and a Leverage Ratio of four percent or greater (three
percent in certain circumstances) and is not "well capitalized"; (iii)
"undercapitalized" if it has a Total Capital Ratio of less than eight percent,
a Tier I Capital Ratio of less than four percent or a Leverage Ratio of less
than four percent (three percent in certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Capital Ratio of less than six percent, a
Tier I Capital Ratio of less than three percent or a Leverage Ratio of less
than three percent; and (v) "critically undercapitalized" if its tangible
equity is equal to or less than two percent of average quarterly tangible
assets. An institution may be downgraded to, or deemed to be in, a capital
category that is lower than is indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. As of June
30, 1998, the Company and the Bank had capital levels that qualifies it as
being "well capitalized" under such regulations.

The FDIC generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized." "Undercapitalized" depository institutions
are subject to growth limitations and are required to submit a capital
restoration plan. The federal banking agencies may not accept a capital plan
without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that the
institution will comply with such capital restoration plan. The aggregate
liability of the parent holding company is limited to the lesser of (i) an
amount equal to five percent of the depository institution's total assets at
the time

32
<PAGE>

it became "undercapitalized"; and (ii) the amount which is necessary (or would
have been necessary) to bring the institution into compliance with all capital
standards applicable with respect to such institution as of the time it fails
to comply with the plan. If a depository institution fails to submit an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" insured depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions arc subject to the
appointment of a receiver or conservator. A bank that is not "well capitalized"
is subject to certain limitations relating to so-called "brokered" deposits.

INTERSTATE BANKING AND BRANCHING LEGISLATION. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate
acquisitions of banks and bank holding companies without geographic limitation,
subject to any state requirement that the bank has been organized for a minimum
period of time, not to exceed five years, and the requirement that the bank
holding company, prior to, or following the proposed acquisition, controls no
more than ten percent of the total amount of deposits of insured depository
institutions in the U.S. and no more than 30% of such deposits in any state (or
such lesser or greater amount set by state law).

In addition, the IBBEA permits a bank to merge with a bank in another
state as long as neither of the states has opted out of interstate branching
prior to May 31, 1997. North Carolina has "opted in" to such legislation,
effective June 22, 1995. In addition, a bank may establish and operate a DE
NOVO branch in a state in which the bank does not maintain a branch if that
state expressly permits DE NOVO interstate branching. As a result of North
Carolina's opt-in law, North Carolina law permits unrestricted interstate de
NOVO branching.

FDIC INSURANCE ASSESSMENTS. Effective January 1, 1996, the FDIC reduced
the insurance premiums it currently charges on bank deposits insured by the
Bank Insurance Fund ("BIF") to the statutory minimum of $2,000 for "well
capitalized" banks.

EFFECTS OF GOVERNMENTAL POLICIES. The earnings and business of the Company
and the Bank are and will be affected by the policies of various regulatory
authorities of the United States, especially the Federal Reserve. The Federal
Reserve, among other things, regulates the supply of credit and deals with
general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve for those purposes influence in
various ways the overall level of investments, loans, other extensions of
credit and deposits, and the interest rates paid on liabilities and received on
assets.

FEDERAL SECURITIES LAW

The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act'), for the registration
of the Common Stock to be issued in the Subscription Offering. The Company has
already registered with the SEC under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and has therefore been subject, among other
things, to the information, proxy solicitation, insider trading restrictions,
and other requirements of the Exchange Act since it became the bank holding
company for the Bank.

The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) one percent of the outstanding shares of
the Company or (ii) the average weekly volume of trading in such shares during
the preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding.

33
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The Company and the Bank and its subsidiaries each have a separate Board
of Directors and separate Executive Officers in furtherance of the Company's
goal of maintaining broad representation from throughout its community. In
addition, the Company has adopted certain provisions in its Bylaws meant to
achieve that goal by requiring a rotating Board of Directors and allowing any
eligible shareholder an opportunity, within a certain framework, to nominate
persons to serve as directors. The Bylaws require that the Board of Directors
be comprised of eighteen (18) persons, at least three-fourths of which are
residents of Stanly County. Moreover, the Bylaws contain a term limitation
providing that no director may be elected to more than two consecutive
three-year terms without a break in tenure. The Board of Directors is staggered
with each director currently serving three year terms, unless a director is
filling a vacancy, in which case, he or she will serve until the next
shareholders' meeting at which directors are elected. Nominations for election
to the Board of Directors are made not only by the Nominating Committee of the
Board of Directors, but also may be made by any holder of shares entitled to
vote at any meeting of shareholders at which directors are to be elected, as
long as such nominations are made in writing and delivered to the President and
Chief Executive Officer or Secretary of the Company not less than fourteen days
nor more than thirty days prior to the meeting at which such directors will be
elected.

The directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION
- ----------------------------- --------------------------------------------------------------------------
<S> <C>
William S. Aldridge, Jr. Manager, Secretary-Treasurer, and co-owner, Stanly Funeral Home, Inc.,
(70) Albemarle, NC
Cynthia H. Beane Cynthia H. Beane, CPA, Albemarle, NC (certified public accountant)
(49)
Joe S. Brooks Partner, Brothers Precision Tool Company, Albemarle, NC (tool and die
(49) business)
Ronald T. Burleson Partner, Thurman Burleson & Sons Farm, Richfield, NC (farming
(48) operation)
Bill C. Burnside, DDS Albemarle, NC (dentistry)
(48)
Gail C. Burris Owner and Manager, Rosebriar Restaurant, Albemarle, NC
(44)
G. Chad Efird Retired; previously, Technical Supervisor, Aluminum Company of America
(76) (ALCOA), Badin, NC (aluminum products manufacturer)
David M. Jones, D.V.M. Director, North Carolina Zoological Park, Asheboro, NC (NC Department
(53) of Environmental and Natural Resources) since March 1994; previously,
Director of Conservation and Consultancy, Zoological Society of
London, London, England.
James F. Link, D.V.M. Veterinarian and Owner, North Stanly Animal Clinic, New London, NC
(45)
W. Chester Lowder Director of Field Services, North Carolina Farm Bureau Federation,
(49) Raleigh, NC (agricultural service agency); President, Fork "L" Farm,
Inc., Norwood, NC (farming operation)
Buren Mullis Retired; previously, Vice President and General Manager of Sundrop
(65) Bottling Co., Inc., Concord, NC
John P. Murray, M.D. Retired; previously, Physician and owner, Albemarle Ear, Nose and Throat,
(57) Albemarle, NC
Kent E. Newport President, KDS, Inc. DBA Coy's Laundromat, Albemarle, NC (coin laundry
(37) and self-service carwash)
Catherine A. Pickler Homemaker and Community Volunteer, New London, NC
(64)
George T. Reaves Retired; previously, Vice President Traffic and Transportation, Collins &
(70) Aikman Corporation, Albemarle, NC (manufacturer of automotive
fabrics, upholstery, yarns)
A. James Russell Construction Manager, J.T. Russell & Sons, Inc., Albemarle, NC (highway
(44) heavy utility construction)
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION
- ----------------------- ------------------------------------------------------------------------
<S> <C>
B. A. Smith, Jr. Retired; previously, Pilot and Base Commander, United States Air Force
(64)
Douglas V. Waddell Retired; previously, Manager, Sears & Roebuck -- Automotive Department,
(69) Albemarle, NC (retail store)
</TABLE>

BANK OF STANLY BOARD OF DIRECTORS

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION
- -------------------------- -----------------------------------------------------------------------
<S> <C>
William F. Clayton Retired; previously, Cost Office Supervisor, Aluminum Company of
(51) America (ALCOA), Badin, NC (aluminum products manufacturer)
W. Kermit Efird President, Rocky River Springs Fish House, Inc., Norwood, NC
(68) (restaurant)
James L. Harris Retired; previously, Specialty Sales Manager, Southwire Company,
(74) Carrollton, GA
Eric M. Johnsen, M.D. President, Stanly Family Care Clinic, Albemarle, NC
(52)
Jerry J. Long President, Secretary & Co-Owner, Long's Diamond Broker, Albemarle, NC
(67) (previously, Long's Jewelers, Inc.)
James R. Mauney, Sr. Retired; previously, President and Owner Mauney Feed Mill, New London,
(71) NC
Pamela S. Morton Principal, Endy Elementary School, Albemarle, NC
(45)
Boyce E. Thompson Treasurer, Stanly Fixtures Company, Inc., Norwood, NC
(48) (store fixture manufacturer)
</TABLE>

THE STRATEGIC ALLIANCE CORPORATION AND BOS AGENCY, INC.,
BOARD OF DIRECTORS

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION
- --------------------------- ---------------------------------------------------------------------------
<S> <C>
Jerry W. Almond, Sr. President, Stanly Fixtures Company, Inc., Norwood, NC
(56) (store fixture manufacturer)
Cletus J. Burns, Jr. Manager, Finishing Department, Collins & Aikman Corporation,
(50) Albemarle, NC (manufacturer)
Robert L. Isenhour Retired; previously, Owner and Operator, Stanly Shale Products Division of
(70) Sanford, Norwood, NC
Joseph R. Kluttz, Jr. President, Albemarle Insurance Agency, Inc., Albemarle, NC
(60)
James E. Nance President and General Manager, Confederate Motors, Inc., Albemarle, NC
(47) (automobile dealership)
Michael E. Snyder, Sr. Vice President of Research and Development, E. J. Snyder & Company,
(57) Inc., Albemarle, NC (textile dyeing company)
Hugh E. Wallace Owner and President, Anson Apparel Company, Wadesboro, NC
(63) (textile manufacturing)
</TABLE>

EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK AND ITS SUBSIDIARIES

<TABLE>
<CAPTION>
NAME AND AGE CURRENT POSITION WITH COMPANY AND/OR ITS SUBSIDIARIES
- --------------------------- ------------------------------------------------------
<S> <C>
Ronald B. Davis President and Chief Executive Officer of the Bank
(50)
Roger L. Dick President and Chief Executive Officer of the Company
(47)
Susan B. Gibson Vice President of the Bank (human resources)
(37)
Jacqueline S. Jernigan Executive Vice President of the Bank (retail banking)
(43)
Dawn L. Melton Executive Vice President of the Company (technology)
(38)
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
NAME AND AGE CURRENT POSITION WITH COMPANY AND/OR ITS SUBSIDIARIES
- --------------------------- --------------------------------------------------------------------------
<S> <C>
Tamara M. Singletary Executive Vice President of the Company (marketing and investor
(38) relations)
Christy D. Stoner President of The Strategic Alliance Corporation, a subsidiary of the Bank
(33)
Thomas H. Swaringen Executive Vice President of the Bank (credit administration)
(54)
Barbara S. Williams Senior Vice President of the Company (finance)
(54)
O. David Williams, Jr. Senior Vice President of the Bank (commercial banking)
(39)
</TABLE>

DESCRIPTION OF CAPITAL STOCK

The following summary of certain provisions of the Company's Articles of
Incorporation , as amended (the "Articles"), and Bylaws, as amended (the
"Bylaws"), does not purport to be complete and is qualified in its entirety by
reference to such instruments.

AUTHORIZED CAPITAL

The Company is authorized to issue 6,000,000 shares of Common Stock, par
value $1.25 per share, of which on June 30, 1998, 2,294,536 shares were
outstanding and held of record by 1,619 persons, and 276,197 shares were
reserved for issuance under the Company's various equity compensation plans. On
July 21, 1998, the Company declared a 2-for-1 stock split for shareholders as
of August 4, 1998, to be effected in the form of a 100% stock dividend and paid
on August 20, 1998. As a result, the number of shares currently outstanding is
4,589,072. The Board of Directors is not authorized to issue preferred stock.

Each share of the Common Stock issued will have the same relative rights
and will be identical in all respects with every other share of Common Stock
already outstanding. Each shareholder will be entitled to one vote for each
share held of record on all matters submitted to a vote of holders of shares of
Common Stock. Each share of Common Stock is entitled to share equally in
dividends from legally available funds when declared by the Board of Directors.
In the event of a liquidation, dissolution or winding up of the Company, each
holder of shares of the Common Stock would be entitled to receive, after
payment of all debts and liabilities of the Company, a pro rata portion of all
assets of the Company available for distribution to holders of the Common
Stock.

No conversion rights, or redemption or sinking fund provisions are
applicable to the Common Stock. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption and
all outstanding shares of Common Stock are, upon issuance, validly issued,
fully paid and non-assessable.

The existence of authorized but unissued shares of Common Stock could have
the effect of discouraging unsolicited takeover attempts. Such shares could be
issued to a purchaser who might cooperate with the Board of Directors in
opposing an attempt by a third party to gain control of the Company.

CERTAIN ARTICLES AND BYLAW PROVISIONS HAVING POTENTIAL ANTI-TAKEOVER EFFECTS

GENERAL. A number of provisions of the Articles and Bylaws address matters
of corporate governance and the rights of shareholders. The following summary
of such provisions is not intended to be complete and is qualified in all
respects by the Articles and Bylaws. Certain of these provisions may delay or
prevent takeover attempts not first approved by the Board of Directors
(including takeovers which certain shareholders may deem to be in their best
interests.) These provisions also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders. In addition,
certain of the laws applicable to the Company may have the effect of
preventing, discouraging or delaying a change in control in the Company. All
references to the Articles are to the Company's Articles in effect as of the
date of this Prospectus.

CLASSIFICATION OF THE BOARD OF DIRECTORS. According to the Company's
Bylaws, the number of directors constituting the Board of Directors shall be
eighteen (18). Directors must be shareholders of the Corporation and at least
three-fourths of the directors of the Company must be residents of Stanly
County, North Carolina. The Articles provide that the Board of Directors of the
Company is divided into three classes, Class I, Class II, and Class III, which
shall be as nearly equal in number as possible. Each director shall serve for a
term ending on the date of the third annual meeting of shareholders following

36
<PAGE>

the annual meeting at which the director was elected. A director elected to
fill a vacancy shall serve for the remainder of the present term of office of
the class to which he was elected. As a result of the classification of the
Board of Directors, approximately one-third of the members of the Board of
Directors will be elected each year, and two annual meetings will be required
for the Company's shareholders to change a majority of the members constituting
the Board of Directors.

LIMITATION OF TERMS OF THE BOARD OF DIRECTORS. The Company's Bylaws, in
furtherance of its goal of maintaining broad representation from throughout its
community, contain a term limitation providing that no director may be elected
to more than two consecutive three-year terms without a break in tenure;
provided, that, in addition to said two consecutive three-year terms and
without a break in tenure, any director may also serve any portion of an
unexpired term or any Special Term (as defined within the Bylaws) to which such
director may have been appointed or elected.

NOMINATIONS TO THE BOARD OF DIRECTORS. The Company's Bylaws allow any
eligible shareholder an opportunity, within a certain framework, to nominate
persons to serve as a director. Nominations for election to the Board of
Directors are made by the Nominating Committee of the Board of Directors, but
also can be made by any holder of shares entitled to be voting at any meeting
of shareholders at which directors are to be elected, as long as such
nominations are made in writing and delivered to the President and Chief
Executive Officer or Secretary of the Company not less than fourteen days nor
more than thirty days prior to the meeting at which such nominations will be
made.

SPECIAL MEETINGS OF SHAREHOLDERS. The Bylaws provide that special meetings
of shareholders may be called only by the Chief Executive Officer, President,
Secretary, or Board of Directors of the Company, upon the written request of
the holders of not less than 10% of all the shares entitled to vote at the
meeting. As a result, this provision would prevent shareholders owning less
than 10% of the voting power of the outstanding Common Stock from compelling
shareholder consideration of any proposal (such as a proposal for a merger or
business combination) over the opposition of the Company's Board of Directors.

SUPERMAJORITY VOTE REQUIREMENTS. The Articles generally provide that the
Company cannot merge with or into, any other corporation or convey to any
corporation or other person or otherwise dispose of all or substantially all of
the assets of the Company or all of the outstanding shares of the Company's
capital stock, unless such transaction is approved by sixty-six and two-thirds
percent (66 2/3%) of all votes entitled to be cast on such matter and, if
separate voting by any one or more voting groups is required, by that
percentage of the votes entitled to be case in such matters by each such voting
group. If applicable law requires a greater vote of the Company's shareholders
for the approval of the transaction or allows such transaction to be effected
without the approval of the Company's shareholders or of any voting group, then
such provision in the Articles shall not apply to the transaction.

BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN
OFFER BY ANOTHER PARTY. The Articles allow the Board of Directors, in
evaluating a merger, consolidation, or other business combination transaction
(hereunder a "Business Combination") or a tender or exchange offer, to
consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan
and other customers, creditors and other elements of the communities in which
the Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity;
and (iii) the competence, experience and integrity of the acquiring person or
entity and its or their management; and (iv) the prospects for a successful
conclusion of the Business Combination. By having these standards in the
Articles of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose any proposed Business Combination or tender or
exchange offer if the Board concludes that the transaction would not be in the
best interest of the Company, even if the price offered is significantly
greater than the then market price of any equity security of the Company.

The Board of Directors feels a responsibility for maintaining the
financial and business integrity of the Company. Banks and their holding
companies occupy positions of special trust in the communities they serve. They
also provide opportunities for abuse by those who are not of sufficient
experience or competence or financial means to act professionally and
responsibly with respect to management of a financial institution. It is of
concern to the Company that it be managed in the interest of the communities
that it serves and that it and its subsidiary bank maintain its integrity as an
institution.

One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of the Company. The provision
will not make a Business Combination regarded by the Board of Directors as
being in the interests of the

37
<PAGE>

Company more difficult to accomplish, but it will permit the Board of Directors
to determine whether a Business Combination or tender or exchange offer is not
in the interests of the Company (and thus to oppose it) on the basis of various
factors deemed relevant.

ABSENCE OF CUMULATIVE VOTING. The Company's Articles of Incorporation do
not authorize cumulative voting by shareholders for the election of the
Company's directors. The absence of cumulative voting rights effectively means
that the holders of a majority of the shares voted at a meeting of shareholders
may, if they so choose, elect all directors of the Company to be elected at
that meeting, thus precluding minority shareholder representation on the
Company's Board of Directors.

REMOVAL OF DIRECTORS; FILLING VACANCIES. The Bylaws provide that (i)
shareholders may remove one or more of the directors with or without cause;
(ii) a director may be removed only by a vote in favor of such removal of the
holders of at least a majority of the voting power of the Corporation's
outstanding shares entitled to be voted generally in the election of directors;
and (iii) a director may not be removed by the shareholders at a meeting unless
the notice of the meeting states that the purpose, or one of the purposes, of
the meeting is removal of the director. In addition, vacancies occurring in the
Board of Directors, including without limitation a vacancy resulting from an
increase in the number of directors or from the failure by the shareholders to
elect the full authorized number of directors, may be filled by the
shareholders or by the Board of Directors, whichever group shall act first. If
the directors remaining in office do not constitute a quorum, the directors may
fill the vacancy by the affirmative vote of a majority of the remaining
directors or by the sole remaining director. If the vacant office was held by a
director elected by a voting group, only the remaining director or directors
elected by that voting group or the holders of shares of that voting group are
entitled to fill the vacancy.

CONTROL SHARE ACQUISITION ACT

The Company is also subject to the North Carolina Control Share
Acquisition Act (the "Control Share Act") which provides that any person or
party who acquires "control shares" (defined therein as a number of shares
which, when added to other shares held, gives the holder voting power in the
election of directors equal to 20% or 33 1/3%, or a majority of all voting
power) may only vote those shares if the remaining shareholders of the Company,
by resolution, permit them to be voted. If the shareholders of the Company
permit the control shares to be accorded voting rights and the holder of the
control shares has a majority of all voting power for the election of
directors, the other shareholders of the Company have the right to the
redemption of their shares at the fair value as the day prior to the date on
which the vote was taken which gave voting rights to the control shares. The
Control Share Act could discourage a person from acquiring a large number of
shares of the Company if, the purpose is to seek control for the Company after
obtaining a control position. Some shareholders may determine this provision as
not in their best interests.

THE SHAREHOLDER PROTECTION ACT

The Company is subject to the North Carolina Shareholder Protection Act
(the "Shareholder Protection Act") which is designed to prevent the abuses that
sometimes occur during hostile takeovers. The Shareholder Protection Act
generally requires that, unless certain "fair price" and procedural
requirements are satisfied, the affirmative vote of the holders of 95% of the
outstanding shares of the Company's Common Stock (excluding shares owned by an
"Interested Shareholder") is required to approve certain business combination
transactions with another entity that is the beneficial owner of more than 20%
of the Company's voting shares or which is an affiliate of the Company and
previously has been 20% beneficial owner.

In order to satisfy the "fair price" provisions, the price paid for any
shares in the second phase of an acquisition must be at least equal to the
highest of : (i) the highest per share price ever paid by anyone who is a part
of the acquiror, (ii) a price that exceeds the market price when the second
phase of the acquisition is announced by the same percentage as the highest
price paid by the acquiror exceeds the market price immediately before the
acquisition began; or (iii) a price computed by multiplying the Company's
annual earnings per share by the price/earnings multiple, if any, of the
acquiror.

In addition, the procedural provisions require that: (i) the Company's
Board of Directors must maintain representation by continuing directors
proportionate to shares held by persons unaffiliated with the acquiror; (ii)
there must be no reduction in dividends except as approved by a unanimous vote
of directors; (iii) the acquiror must not acquire any additional shares of the
Company after the transaction in which it acquired its 20% interest; (iv) the
acquiror must not receive the benefit, directly or indirectly, except
proportionately with other shareholders, of any loans, advances, guarantees, or
financial assistance from the Company prior to consumption of the business
transactions; (v) the acquiror must not, prior to the consummation of the
business transaction, make a major change in the Company's business or equity
capital structure unless by unanimous vote of the directors; and (vi) the
acquiror must distribute to the shareholders a proxy statement responsive

38
<PAGE>

to the requirements of applicable federal securities laws, which must contain
any recommendations by the continuing directors and can include a fairness
opinion from an independent investment banking firm regarding the transaction.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Co., New York, New York.

SELF-MANAGED STOCK OFFERING

The Company has offered these shares without the use of an investment
banking firm acting as underwriters. The Company has retained The Meritas
Group, Inc. to assist with the record keeping and data processing matters
related to the Offering and to provide personnel to operate a stock information
center. Meritas personnel are not stock brokers or dealers and do not solicit
orders nor are they paid a commission.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Moore & Van Allen, PLLC, Charlotte and Raleigh, North
Carolina.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, have been included herein and in the registration statement
of which this Prospectus is a part in reliance upon the report of Dixon Odom,
PLLC, independent auditors, included herein, and upon the authority of such
firm as experts in accounting and auditing. The Meritas Group, Inc. has
consented to the publication herein of the summary of its valuation report to
the Company setting forth its opinion as to the estimated market value of the
Common Stock of the Company and to the use of its name and statements with
respect to it appearing herein.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by the Company may be inspected and copies at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the SEC's
Regional Offices located at 7 World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material also may be obtained from the web site that
the SEC maintains at http://www.sec.gov.

The Company has filed with the SEC a registration statement on Form S-2
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information, reference is
hereby made to the Registration Statement.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the SEC (File No. 0-22062) pursuant to
the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997; and

2. All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the year end of the fiscal year covered by
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any and all of the
documents which are incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated

39
<PAGE>

by reference into such documents). Requests should be directed to the Company
at 167 North Second Street, P. O. Box 338, Albemarle, North Carolina
28002-0338, (704) 983-6181.

Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
is or is deemed to be incorporated by reference herein modified or supersede
such statement. Any statement so modified shall not be deemed to constitute a
part of this Prospectus except as so modified, and any statement as superseded
shall not be deemed to constitute part of this Prospectus.

FORWARD LOOKING STATEMENTS

Information set forth in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business"
contains various "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act, which statements
represent the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology, such as "may," "will,"
"expect" "anticipate" "estimate," or "continue" or the negative thereof or
other variations thereof or comparable terminology.

The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the effects of future economic conditions,
governmental fiscal and monetary policies, legislative and regulatory changes,
the risks of changes in interest rates on the level and composition of
deposits, the effects of competition from other financial institutions, the
failure of assumptions underlying the establishment of the allowance for
possible loan losses, the low trading volume of the Common Stock, other
considerations described in connection with specific forward looking
statements, factors set forth in this Prospectus under the caption "Risk
Factors" and other cautionary elements specified in documents incorporated by
reference in this Prospectus.

40
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................. F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 ... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December
31, 1997, 1996 and
1995 .................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and F-6
1995
Notes to Consolidated Financial Statements ............................................... F-7
Consolidated Balance Sheets as of June 30, 1998 and 1997 (Unaudited) ..................... F-22
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997 F-23
(Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June
30, 1998 and 1997
(Unaudited) ............................................................................. F-24
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 F-25
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) ................................... F-26
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
UWHARRIE CAPITAL CORP
Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie
Capital Corp (formerly Stanly Capital Corp) and subsidiary (the "Company") as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Uwharrie
Capital Corp and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.

DIXON ODOM PLLC
SOUTHERN PINES, NORTH CAROLINA
JULY 24, 1998

F-2
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................. $ 4,322,571 $ 4,583,678
Due from banks, interest-bearing .................................................... 183,511 299,494
Investment securities available for sale, at fair value ............................. 23,846,794 25,220,437
Loans ............................................................................... 113,984,894 100,852,450
Less allowance for loan losses ...................................................... 1,124,970 1,049,833
------------- -------------
Net loans ........................................................................ 112,859,924 99,802,617
Premises and equipment, net ......................................................... 2,343,737 2,117,249
Interest receivable ................................................................. 930,503 857,794
Other assets ........................................................................ 1,216,914 994,318
------------- -------------
Total assets ..................................................................... $ 145,703,954 $ 133,875,587
============= =============
LIABILITIES
Deposits
Demand, noninterest-bearing ........................................................ $ 13,871,742 $ 12,852,376
Money market and NOW accounts ...................................................... 28,569,039 24,112,851
Savings accounts ................................................................... 31,870,829 27,706,578
Time deposits, $100,000 and over ................................................... 9,045,532 6,502,755
Other time deposits ................................................................ 33,548,182 33,424,904
------------- -------------
Total deposits ................................................................... 116,905,324 104,599,464
Federal funds purchased and securities sold under repurchase agreements ............. 5,447,330 8,156,145
Other short-term borrowed funds ..................................................... 2,562,058 3,000,000
Long-term debt ...................................................................... 7,574,509 6,265,660
Interest payable .................................................................... 171,031 176,042
Other liabilities ................................................................... 509,566 374,871
------------- -------------
Total liabilities ................................................................ 133,169,818 122,572,182
Off balance sheet items, commitments and contingencies -- Note 11
SHAREHOLDERS' EQUITY
Common stock, $1.25 par value 6,000,000 shares authorized; shares issued and
outstanding of 2,282,078 and 2,174,982, respectively ............................... 2,852,598 2,718,728
Additional paid-in capital .......................................................... 5,524,178 4,593,661
Undivided profits ................................................................... 3,838,263 3,738,055
Net unrealized gain on securities available for sale, net of related tax effect ..... 319,097 252,961
------------- -------------
Total shareholders' equity ....................................................... 12,534,136 11,303,405
------------- -------------
Total liabilities and shareholders' equity ....................................... $ 145,703,954 $ 133,875,587
============= =============
</TABLE>

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

F-3
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees .................................................... $ 9,377,504 $ 8,551,597 $ 7,421,870
Investment securities
U. S. Treasury ......................................................... 287,738 342,402 440,340
U. S. Government agencies and corporations ............................. 906,045 700,636 633,859
State and political subdivisions ....................................... 340,017 349,680 354,157
Other .................................................................. 72,747 52,633 46,600
Short-term investments ................................................... 34,391 43,371 16,592
------------ ------------ -----------
Total interest income ................................................. 11,018,442 10,040,319 8,913,418
------------ ------------ -----------
INTEREST EXPENSE
Time deposits, $100,000 and over ......................................... 432,098 314,446 288,461
Other interest-bearing deposits .......................................... 3,538,597 3,371,130 3,036,683
Federal funds purchased and securities sold under repurchase agreements .. 255,575 345,622 290,027
Other short-term borrowed funds .......................................... 177,689 49,047 24,978
Long-term debt ........................................................... 474,818 431,176 411,186
------------ ------------ -----------
Total interest expense ................................................ 4,878,777 4,511,421 4,051,335
------------ ------------ -----------
NET INTEREST INCOME ....................................................... 6,139,665 5,528,898 4,862,083
Provision for loan losses ................................................. 183,300 136,845 77,346
------------ ------------ -----------
Net interest income after provision for loan losses ....................... 5,956,365 5,392,053 4,784,737
------------ ------------ -----------
NONINTEREST INCOME
Service charges on deposit accounts ...................................... 911,106 901,360 774,783
Other service fees and commissions ....................................... 482,653 390,854 354,063
Gains on securities sold ................................................. 22,965 29,367 57,985
Other income (expense) ................................................... 74,416 39,626 (4,141)
------------ ------------ -----------
Total noninterest income .............................................. 1,491,140 1,361,207 1,182,690
------------ ------------ -----------
NONINTEREST EXPENSE
Salaries and employee benefits ........................................... 2,920,471 2,542,272 2,266,308
Net occupancy expense .................................................... 262,287 221,036 211,870
Equipment expense ........................................................ 412,405 432,837 411,023
Data processing costs .................................................... 496,194 493,139 481,348
Other operating expense .................................................. 1,630,332 1,587,867 1,617,462
------------ ------------ -----------
Total noninterest expenses ............................................ 5,721,689 5,277,151 4,988,011
------------ ------------ -----------
Income before income taxes ................................................ 1,725,816 1,476,109 979,416
Income taxes .............................................................. 539,896 450,720 198,357
------------ ------------ -----------
NET INCOME ................................................................ $ 1,185,920 $ 1,025,389 $ 781,059
============ ============ ===========
NET INCOME PER COMMON SHARE
Basic .................................................................... $ .26 $ .22 $ .17
Assuming dilution ........................................................ .25 .22 $ .17
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .................................................................... 4,560,506 4,585,018 4,619,056
Assuming dilution ........................................................ 4,663,804 4,585,018 4,619,056
</TABLE>

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

F-4
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

COMMON STOCK NET
--------------------------- ADDITIONAL UNREALIZED
PAID-IN UNDIVIDED GAIN (LOSS)
SHARES AMOUNT CAPITAL PROFITS ON SECURITIES TOTAL
------------- ------------- ------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 ............ 2,114,134 $2,642,668 $4,376,183 $ 3,130,525 $ (425,634) $ 9,723,742
Net income ............................ -- -- -- 781,059 -- 781,059
Common stock issued pursuant to:
3% stock dividend ................... 61,465 76,831 277,207 (354,038) -- --
Stock options exercised ............. 32,123 40,154 49,338 -- -- 89,492
Repurchases of common stock ........... (83,723) (104,654) (374,968) -- -- (479,622)
Dividends paid--$.09 per share ........ -- -- -- (189,617) -- (189,617)
Increase in investment in
unconsolidated subsidiary ........... -- -- 48,800 -- -- 48,800
Net increase in fair value of
securities available for sale ....... -- -- -- -- 938,827 938,827
--------- ---------- ---------- ------------ ---------- -----------
BALANCE AT DECEMBER 31, 1995 .......... 2,123,999 2,654,999 4,376,560 3,367,929 513,193 10,912,681
Net income ............................ -- -- -- 1,025,389 -- 1,025,389
Common stock issued pursuant to:
3% stock dividend ................... 62,698 78,372 360,514 (438,886) -- --
Stock options exercised ............. 42,850 53,563 140,270 -- -- 193,833
Repurchases of common stock ........... (54,565) (68,206) (283,683) -- -- (351,889)
Dividends paid--$.10 per share ........ -- -- -- (216,377) -- (216,377)
Net decrease in fair value of
securities available for sale ....... -- -- -- -- (260,232) (260,232)
--------- ---------- ---------- ------------ ---------- -----------
BALANCE AT DECEMBER 31, 1996 .......... 2,174,982 2,718,728 4,593,661 3,738,055 252,961 11,303,405
Net income ............................ -- -- -- 1,185,920 -- 1,185,920
Common stock issued pursuant to:
5% stock dividend ................... 107,962 134,953 944,667 (1,079,620) -- --
Stock options exercised ............. 3,152 3,940 10,952 -- -- 14,892
Repurchases of common stock ........... (4,018) (5,023) (25,102) -- -- (30,125)
Dividends paid--fractional shares..... -- -- -- (6,092) -- (6,092)
Net increase in fair value of
securities available for sale ....... -- -- -- -- 66,136 66,136
--------- ---------- ---------- ------------ ---------- -----------
BALANCE AT DECEMBER 31, 1997 .......... 2,282,078 $2,852,598 $5,524,178 $ 3,838,263 $ 319,097 $12,534,136
========= ========== ========== ============ ========== ===========
</TABLE>

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

F-5
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................... $ 1,185,920 $ 1,025,389 $ 781,059
Adjustments to reconcile net income to net cash provided by operations:
Depreciation ............................................................... 257,360 235,280 212,378
Accretion of security premiums ............................................. (10,524) (17,959) (39,471)
Provision for loan losses .................................................. 183,300 136,845 77,346
Deferred income tax expense ................................................ 5,329 158,716 96,686
Gain on sale of securities available for sale, net ......................... (22,965) (29,367) (57,985)
Loss on disposals of premises and equipment ................................ -- 14,752 4,098
(Gain) loss on sale of foreclosed properties ............................... -- (6,779) 31,393
Net change in interest receivable ............................................ (72,709) 8,012 (54,395)
Net change in other assets ................................................... (222,596) 20,327 743,057
Net change in interest payable ............................................... (5,011) 11,477 17,044
Net change in accrued and other liabilities .................................. 86,869 11,463 232,372
------------- ------------- -------------
Net cash provided by operating activities .................................. 1,384,973 1,568,156 2,043,582
------------- ------------- -------------
INVESTING ACTIVITIES
Net (increase) decrease in due from banks, interest-bearing .................. 115,983 (153,748) (36,183)
Proceeds from sales of securities available for sale ......................... 3,339,581 7,198,862 7,652,006
Proceeds from maturities of securities available for sale .................... 2,490,823 317,821 2,150,000
Purchase of securities available for sale .................................... (4,314,639) (10,003,476) (7,895,654)
Net increase in loans made to customers ...................................... (13,289,105) (10,090,781) (10,734,869)
Purchase of premises and equipment ........................................... (483,848) (269,979) (229,779)
Proceeds from sales of foreclosed properties ................................. 48,498 130,691 24,900
------------- ------------- -------------
Net cash used by investing activities ...................................... (12,092,707) (12,870,610) (9,069,579)
------------- ------------- -------------
FINANCING ACTIVITIES
Net increase in deposit accounts ............................................. 12,305,860 8,805,526 2,558,931
Net increase (decrease) in federal funds purchased ........................... 1,400,000 (2,850,000) 550,000
Net increase (decrease) in securities sold under repurchase agreements ....... (4,108,815) 3,693,805 4,462,339
Net increase (decrease) in other short-term borrowed funds ................... (437,942) 3,000,000 --
Proceeds from long-term advances from Federal Home Loan Bank ................. 2,000,000 2,000,000 --
Repayment of long-term advances from Federal Home Loan Bank .................. (691,151) (1,696,552) (624,138)
Repurchases of common stock .................................................. (30,125) (351,889) (479,622)
Proceeds from issuance of common stock ....................................... 14,892 193,833 89,492
Dividends paid ............................................................... (6,092) (216,377) (189,617)
------------- ------------- -------------
Net cash provided by financing activities .................................. 10,446,627 12,578,346 6,367,385
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ................................ (261,107) 1,275,892 (658,612)
Cash and due from banks at beginning of year ................................. 4,583,678 3,307,786 3,966,398
------------- ------------- -------------
Cash and due from banks at end of year ....................................... $ 4,322,571 $ 4,583,678 $ 3,307,786
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid ................................................................ $ 4,883,788 $ 4,499,944 $ 4,034,292
Income taxes paid ............................................................ 539,878 457,000 6,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreclosure of collateral in partial satisfaction of debt .................... 48,498 123,912 --
Increase (decrease) in fair value of securities available for sale, net of
deferred taxes (benefit); 1997 -- $42,497, 1996--$(167,219),
1995 -- $603,268 ........................................................... 66,136 (260,232) 938,827
Increase in investment accounted for using the equity method, net of
deferred tax of $31,200 .................................................... -- -- 48,800
Stock dividends 1997 -- 107,962 shares; 1996 -- 62,698 shares;
1995 -- 61,465 shares ...................................................... 1,079,620 438,886 354,038
</TABLE>

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

F-6
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Uwharrie Capital Corp ("the Company") was incorporated under North
Carolina law for the purpose of becoming the holding company for Bank of Stanly
("the Bank"). Regulatory approval was initially sought in March 1993, and was
subsequently received. On July 1,1993, the Bank became a wholly-owned
subsidiary of the Company whereby the common stock of the Bank was deemed
shares of the Company.

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

In 1987, the Bank established a wholly-owned subsidiary, BOS Agency, Inc.
("BOS Agency"), which engages in investment and insurance product sales. In
1989, the Bank established a second wholly-owned subsidiary, BOS Financial
Corporation, for the purpose of conducting business as a broker/dealer in
securities. During 1993, BOS Financial Corporation changed its name to The
Strategic Alliance Corporation ("Strategic Alliance") and was licensed as a
broker/dealer by the National Association of Securities Dealers.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly-owned subsidiaries, BOS Agency and Strategic
Alliance. All significant intercompany transactions and balances have been
eliminated in consolidation.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents are
defined as those amounts included in the caption "cash and due from banks."
From time to time, the Bank may have deposits in excess of insurance coverage
at other institutions.

SECURITIES HELD TO MATURITY

Securities classified as held to maturity are debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.

SECURITIES AVAILABLE FOR SALE

Securities classified as available for sale are those debt and equity
securities that the Company intends to hold for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital consideration, and
other similar factors. Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in earnings.

F-7
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

LOANS

Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.

The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent cash
payments are received.

The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions.

FORECLOSED REAL ESTATE

Real estate properties acquired through foreclosure or other proceedings
is initially recorded at fair value upon foreclosure, establishing a new cost
basis. After foreclosure, valuations are performed and the foreclosed property
is adjusted to the lower of cost or fair market value of the properties, less
costs to sell. Any write-down at the time of transfer to foreclosed properties
is charged to the allowance for loan losses. Subsequent write-downs are charged
to other expenses. Property is evaluated regularly to ensure that the recorded
amount is supported by its current fair market value.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation.
Land is carried at cost. Additions and major replacements or betterments which
extend the useful lives of premises and equipment are capitalized. Maintenance,
repairs and minor improvements are expensed as incurred. Depreciation is
computed principally by the straight-line method over estimated useful lives,
except in the case of leasehold improvements, which are amortized over the term
of the leases, if shorter. Useful lives range from five years for furniture and
fixtures to ten to thirty years for leasehold improvements and buildings,
respectively. Upon retirement or other disposition of the assets, the cost and
the related accumulated depreciation are removed from the accounts and any
gains or losses are reflected in income.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company currently accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Since the Company is not
required to adopt the fair value based recognition provisions prescribed under
SFAS No. 123, it has elected only to comply with the disclosure requirements
set forth in the Statement, which includes disclosing pro forma net income as
if the fair value based method of accounting had been applied. (See Note 14.)

INCOME TAXES

The Company and its subsidiaries file a consolidated Federal income tax
return and separate North Carolina income tax returns. The provision for income
taxes in the accompanying financial statements is provided on a liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation

F-8
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Accounting Standards Board Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
Statement No. 107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying market value nor liquidation value of the Company.

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

CARRYING AMOUNTS APPROXIMATE FAIR VALUES for the following instruments:
Cash and cash equivalents
Accrued interest receivable and payable
Variable rate loans that reprice frequently where no significant change in
credit risk has occurred
Variable rate money market, demand, NOW and savings accounts
Variable rate time deposits
Federal funds purchased and securities sold under repurchase agreements
Short-term borrowed funds

QUOTED MARKET PRICES, where available, or if not available, based on
quoted market prices of comparable instruments for the following:
Securities available for sale

DISCOUNTED CASH FLOWS using interest rates currently being offered on
instruments with similar terms and with similar credit quality:
Long-term debt
All loans, except variable rate loans described above
Fixed rate time deposits

INVESTMENT IN JOINT VENTURE

During 1992, the Company entered into a joint venture agreement to form
Corporate Data Services, Inc. ("CDS"), a company that provides operations and
data processing services for community banks. The Company had a 50% ownership
interest at December 31, 1997 and 1996. The Company utilizes the equity method
to account for its ownership in the joint venture.

NOTE 2 -- EARNINGS PER COMMON SHARE

Effective with periods ended December 31, 1997, the Company has
implemented Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". This Statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board ("APB")
Opinion No. 15, "Earnings per Share", and makes them comparable to
international earnings per share ("EPS") standards. It replaces the
presentation of primary EPS with the presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and it is

F-9
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- EARNINGS PER COMMON SHARE -- (Continued)

computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the entity.

SFAS No. 128 requires restatement of earnings per share data for all prior
periods presented. For 1996 and 1995, basic and diluted earnings per share are
the same amounts because the dilutive effect of stock options is not
significant.

On July 21, 1998, the Company's Board of Directors declared a two-for-one
stock split, effected in the form of a dividend, whereby all shareholders will
receive an additional share of common stock for each share of stock currently
held. The dividend is payable on August 20, 1998 to shareholders of record on
August 4, 1998. All information presented in the consolidated financial
statements regarding earnings per share and weighted average number of shares
outstanding has been computed giving effect to this stock dividend, and, where
applicable, to the 5% stock dividend paid in 1997 and to the 3% stock dividend
paid in 1996 and 1995.

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

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Weighted average number of common shares used in computing basic
earnings per share ................................................ 4,560,506 4,585,018 4,619,056
Effect of dilutive stock options ................................... 103,298 N/A N/A
--------- --------- ---------
Weighted average number of common shares and dilutive potential
common shares used in computing diluted earnings per share ........ 4,663,804 4,585,018 4,619,056
========= ========= =========
</TABLE>

NOTE 3 -- SECURITIES

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

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- --------------------------------------------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ...................... $ 4,990,027 $ 20,263 $ -- $ 5,010,290
U.S. Government agencies and corporations ..... 1,003,542 -- 10,302 993,240
State and political subdivisions .............. 5,434,737 357,607 -- 5,792,344
Mortgage-backed securities .................... 10,835,374 136,571 -- 10,971,945
------------ --------- -------- -----------
Total debt securities ....................... 22,263,680 514,441 10,302 22,767,819
FHLB and other stock .......................... 1,058,973 20,002 -- 1,078,975
------------ --------- -------- -----------
Total securities available for sale ........... $ 23,322,653 $ 534,443 $ 10,302 $23,846,794
============ ========= ======== ===========
</TABLE>

F-10
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- SECURITIES -- (Continued)

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- --------------------------------------------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ...................... $ 3,980,298 $ 18,860 $ -- $ 3,999,158
U.S. Government agencies and corporations ..... 2,005,132 -- 18,412 1,986,720
State and political subdivisions .............. 5,490,780 328,619 -- 5,819,399
Mortgage-backed securities .................... 12,025,046 78,766 -- 12,103,812
------------ --------- -------- -----------
Total debt securities ....................... 23,501,256 426,245 18,412 23,909,089
FHLB and other stock .......................... 1,303,673 7,675 -- 1,311,348
------------ --------- -------- -----------
Total securities available for sale ........... $ 24,804,929 $ 433,920 $ 18,412 $25,220,437
============ ========= ======== ===========
</TABLE>

At December 31, 1997 and 1996, there were no debt securities being held to
maturity.

An analysis of the unrealized holding gain (loss) and the related income
tax effect for the years ended December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
NET INCREASE
UNREALIZED DEFERRED INCOME TAX (DECREASE) IN
HOLDING GAIN (LOSS) ASSET (LIABILITY) SHAREHOLDERS' EQUITY
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Balance, December 31, 1995 .................... $ 842,959 $ (329,766) $ 513,193
Increase (decrease) in valuation allowance .. (427,451) 167,219 (260,232)
---------- ----------- ----------
Balance, December 31, 1996 .................... 415,508 (162,547) 252,961
Increase (decrease) in valuation allowance .. 108,633 (42,497) 66,136
---------- ----------- ----------
Balance, December 31, 1997 .................... $ 524,141 $ (205,044) $ 319,097
========== =========== ==========
</TABLE>

The amortized cost and fair value of debt securities available for sale at
December 31, 1997, by contractual maturities, are as follows:

<TABLE>
<CAPTION>
AFTER AFTER
IN ONE ONE YEAR FIVE YEARS AFTER
YEAR THROUGH THROUGH TEN
AMORTIZED COST OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
- --------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury ................... $ 1,996,626 $ 2,993,401 $ -- $ -- $ 4,990,027
U.S. Agency ..................... -- 1,003,542 -- -- 1,003,542
State and political ............. 75,084 983,384 4,251,269 125,000 5,434,737
Mortgage-backed securities ...... 15,121 969,997 5,355,418 4,494,838 10,835,374
----------- ----------- ----------- ----------- ------------
Total ........................... $ 2,086,831 $ 5,950,324 $ 9,606,687 $ 4,619,838 $ 22,263,680
=========== =========== =========== =========== ============
FAIR VALUE
- ----------------------------------
U.S. Treasury ................... $ 1,991,870 $ 3,018,420 $ -- $ -- $ 5,010,290
U.S. Agency ..................... -- 993,240 -- -- 993,240
State and political ............. 75,976 1,033,802 4,551,077 131,489 5,792,344
Mortgage-backed securities ...... 15,167 998,080 5,418,180 4,540,518 10,971,945
----------- ----------- ----------- ----------- ------------
Total ........................... $ 2,083,013 $ 6,043,542 $ 9,969,257 $ 4,672,007 $ 22,767,819
=========== =========== =========== =========== ============
</TABLE>

F-11
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- SECURITIES -- (Continued)

<TABLE>
<CAPTION>
AFTER AFTER
IN ONE ONE YEAR FIVE YEARS AFTER
WEIGHTED AVERAGE YEAR THROUGH THROUGH TEN
PERCENTAGE YIELDS OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
- ------------------------------ --------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury .............. 5.36 % 6.37 % --% --% 5.96 %
U.S. Agency ................ -- 5.47 -- -- 5.47
State and political (1) .... 9.84 10.15 9.07 8.15 9.25
Mortgage-backed securities . 7.28 8.03 6.91 7.11 7.09
---- ----- ---- ---- ----
Total ...................... 5.54 % 7.11 % 7.86 % 7.13 % 7.29 %
======= ========== ========== ====== ========
</TABLE>

- ---------
(1) Yield on tax exempt bonds computed on a tax-equivalent basis.

Results from sales of securities available for sale for the years ended
December 31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Gross proceeds from sales ...... $ 3,339,581 $ 7,198,862 $ 7,652,006
Realized gains from sales ...... $ 22,965 $ 41,098 $ 60,656
Realized losses from sales ..... -- (11,731) (2,671)
----------- ----------- -----------
Net realized gains ............. $ 22,965 $ 29,367 $ 57,985
=========== =========== ===========
</TABLE>

At December 31, 1997 and 1996, securities available for sale with a
carrying amount of $10,312,546 and $10,863,459, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted
by law.

NOTE 4 -- LOANS

The composition of net loans as of December 31, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
<S> <C> <C>
Commercial ................. $ 15,674,015 $ 13,647,142
Real estate -- construction 3,840,467 3,716,121
Real estate -- residential . 58,824,912 51,321,091
Real estate -- commercial .. 24,102,199 21,200,977
Consumer ................... 11,451,481 10,889,647
Other ...................... 100,068 112,378
------------- ------------
113,993,142 100,887,356
Deduct:
Allowance for loan losses .. (1,124,970) (1,049,833)
Unearned net loan fees ..... (8,248) (34,906)
------------- ------------
Loans, net ................. $ 112,859,924 $ 99,802,617
============= ============
</TABLE>

Although the Bank's loan portfolio is diversified, there is a
concentration of mortgage real estate loans, primarily one to four family
residential mortgage loans, which represent 51.6% of the total loan portfolio
at December 31, 1997. Commercial loans, secured primarily by real estate, to
finance manufacturing buildings, shopping center locations, commercial
buildings and equipment comprise 21.1% of total loans at December 31, 1997.
There is not a concentration of a particular type of credit in this group of
commercial loans.

F-12
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- LOANS -- (Continued)

An analysis of fixed-rate loan maturities and repricing frequencies of
variable-rate loans as of December 31, 1997 follows:

<TABLE>
<S> <C>
FIXED-RATE LOANS WITH A MATURITY OF:
Three months or less ........................ $ 2,507,312
Over three months through twelve months ..... 6,890,639
Over one year through five years ............ 18,679,583
Over five years ............................. 22,337,070
-------------
Total fixed-rate loans ...................... 50,414,604
-------------
VARIABLE-RATE LOANS WITH A REPRICING FREQUENCY OF:
Three months or less ........................ 60,972,944
Over three months through twelve months ..... 2,169,395
Over one year through five years ............ 427,951
Over five years ............................. --
-------------
Total variable-rate loans ................... 63,570,290
-------------
Total loans ................................. $ 113,984,894
=============
</TABLE>

Impaired loans consist of nonaccrual loans which totaled $322,567 and
$331,738 at December 31, 1997 and 1996, respectively, which had the effect of
reducing net income $7,440 in 1997 and $14,815 in 1996. When loans exceed 90
days past due, they are placed in nonaccrual status. At December 31, 1997 and
1996, loans past due 90 days totaled $9,000 and $57,000, respectively. At
December 31, 1997 and 1996, the Company did not have any loans for which terms
had been modified in troubled debt restructuring.

The Company's loan policies are written to address each lending category,
specifically related to loan-to-value ratios and collateralization methods.
This takes into consideration economic and credit risk of lending areas and
customers associated with each category.

NOTE 5 -- ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 are listed below:

<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
Balance, beginning of year ........... $ 1,049,833 $ 975,475 $ 922,409
----------- ----------- ---------
CHARGE OFFS:
Commercial ........................... 53,900 2,200 --
Real estate .......................... 16,300 13,000 --
Consumer ............................. 70,027 60,425 60,063
----------- ----------- ---------
Total charge-offs .................... 140,227 75,625 60,063
----------- ----------- ---------
RECOVERIES:
Commercial ........................... -- -- 1,000
Real estate .......................... -- -- 6,000
Consumer ............................. 32,064 13,138 28,783
----------- ----------- ---------
Total recoveries ..................... 32,064 13,138 35,783
----------- ----------- ---------
Net charge-offs ...................... 108,163 62,487 24,280
Provision charged against income ..... 183,300 136,845 77,346
----------- ----------- ---------
Balance, end of year ................. $ 1,124,970 $ 1,049,833 $ 975,475
=========== =========== =========
</TABLE>

F-13
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ALLOWANCE FOR LOAN LOSSES -- (Continued)

Ratios relative to the allowance for loan losses, nonperforming loans and
net charge-offs for the years ended December 31, 1997, 1996, and 1995 are
reflected below:

<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Allowance for loan losses to total loans ................ .99% 1.04% 1.07%
Allowance for loan losses to non-performing loans ....... 348.8 316.5 541.7
Nonperforming loans to average loans .................... .30 .34 .22
Net charge-offs to gross loans outstanding .............. .09 .06 .03
</TABLE>

The method used for rating the loan portfolio provides for early detection
of problem loans, and an adequate loan loss provision is established quarterly
for loans considered to be loss, doubtful and substandard. This identification
process begins with loans previously identified by examiners and also includes
loans from management's assessment of credit reviews, payment history, loan to
value ratio and weakness in credit. Changes in the ratio of the allowance for
loans losses to total loans and nonperforming loans reflects this assessment.

The allocation of the allowance for loan losses applicable to each
category of loans at December 31, 1997 and 1996 is presented below:

<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
PERCENT OF PERCENT OF
EACH CATEGORY EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Commercial ................... $ 36,974 14% $ 44,932 14%
Real estate -- construction .. -- 3% -- 4%
Real estate -- mortgage ...... 221,645 73% 212,780 72%
Consumer ..................... 18,480 10% 6,002 10%
Unallocated .................. 847,871 N/A 786,119 N/A
----------- ---- ----------- ---
Total ........................ $ 1,124,970 100% $ 1,049,833 100%
=========== ==== =========== ===
</TABLE>

NOTE 6 -- PREMISES AND EQUIPMENT

The major classes of premises and equipment and the total accumulated
depreciation at December 31, 1997 and 1996 are listed below:

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Land ......................... $ 418,987 $ 341,686
Buildings and improvements ... 1,991,372 1,865,538
Furniture and equipment ...... 1,862,569 1,616,309
----------- -----------
4,272,928 3,823,533
Less accumulated depreciation 1,929,191 1,706,284
----------- -----------
$ 2,343,737 $ 2,117,249
=========== ===========
</TABLE>

F-14
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- DEPOSITS
The composition of deposits at December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Demand deposits ........................... $ 13,871,742 12 % $ 12,852,376 12 %
Money market and NOW accounts ............. 28,569,039 24 24,112,851 23
Savings ................................... 31,870,829 27 27,706,578 27
Time deposits, $100,000 and over .......... 9,045,532 8 6,502,755 6
Other time deposits ....................... 33,548,182 29 33,424,904 32
------------ ------------
$116,905,324 100% $104,599,464 100%
============ ============
</TABLE>

The maturities of fixed-rate time deposits at December 31, 1997 are
reflected in the table below.

<TABLE>
<CAPTION>
TIME DEPOSITS OTHER TIME
REMAINING MATURITIES $100,000 AND OVER DEPOSITS
- ------------------------------------------ ------------------- ---------------
<S> <C> <C>
Three months or less ................ $ 3,861,919 $ 11,010,298
Three through twelve months ......... 3,480,991 16,424,627
Over twelve months .................. 1,702,622 6,113,257
----------- ------------
Total ............................... $ 9,045,532 $ 33,548,182
=========== ============
</TABLE>

NOTE 8 -- SHORT-TERM BORROWED FUNDS

<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
AT YEAR-END AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------ -------------- ---------- -------------- --------
<S> <C> <C> <C> <C>
Federal funds purchased ............................... $ 1,400,000 8.00% $ -- --%
Securities sold under agreement to repurchase ......... 4,047,330 4.46 8,156,145 4.16
Master notes .......................................... 2,562,058 4.42 --
Short-term advances from FHLB ......................... -- -- 3,000,000 5.45
----------- -----------
$ 8,009,388 5.06 % $11,156,145 4.51 %
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
AVERAGE FOR THE YEAR AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------ ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Federal funds purchased ............................... $1,058,900 5.92% $1,556,126 5.68%
Securities sold under agreement to repurchase ......... 4,553,482 4.24 5,763,748 4.46
Master notes .......................................... 907,920 4.36 -- --
Short-term advances from FHLB ......................... 2,415,395 5.65 866,667 5.66
---------- ----------
$8,935,697 4.83% $8,186,541 4.82%
========== ==========
MAXIMUM MONTH-END BALANCE
- -------------------------------------------------------------
Federal funds purchased ............................... $5,725,000 $4,675,000
Securities sold under agreement to repurchase ......... 5,998,530 8,156,145
Master notes .......................................... 2,658,883 --
Short-term advances from FHLB ......................... 8,400,000 3,000,000
</TABLE>

Federal funds purchased represent unsecured overnight borrowings from
other financial institutions. Securities sold under agreement to repurchase
represent short-term borrowings collateralized by securities of the United
States government or its agencies.

Additionally, the Bank had available unused lines of credit for federal
funds in the amount of $9,000,000 at December 31, 1997.

F-15
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- LONG-TERM DEBT
Advances from the Federal Home Loan Bank of Atlanta ("FHLB") with original
maturities of one year or more consist of the following at December 31, 1997
and 1996:

<TABLE>
<CAPTION>
MATURING
YEAR
ENDING INTEREST
DECEMBER 31 RATE(%) 1997 1996
- -------------- ------------- -------------- --------------
<S> <C> <C> <C>
1998 5.40 - 6.94 $ 2,599,252 $ 621,552
1999 6.07 - 6.94 1,574,252 1,596,552
2000 6.41 - 6.94 471,552 571,552
2001 5.80 - 6.94 1,421,552 471,552
2002 6.41 - 6.94 371,552 --
Thereafter 6.41 - 7.53 1,136,349 3,004,452
----------- -----------
$ 7,574,509 $ 6,265,660
=========== ===========
</TABLE>

Pursuant to collateral agreements with the FHLB, advances are
collateralized by all the Company's stock in FHLB and its qualifying first
mortgage loans with principal balances of $48,915,854 and $43,456,511 at
December 31, 1997 and 1996, respectively. Total credit available from the FHLB
for short- or long-term borrowing at December 31, 1997 was $30,000,000.

NOTE 10 -- INCOME TAX MATTERS

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

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense ........ $ 534,567 $ 292,004 $ 101,671
Deferred tax expense ....... 5,329 158,716 96,686
--------- --------- ---------
$ 539,896 $ 450,720 $ 198,357
========= ========= =========
</TABLE>

The effective income tax rates for 1997 and 1996 were 31.3% and 30.5%,
respectively. The reasons for the differences between the effective rates and
income taxes computed at the statutory federal income tax rate of 34% for each
of those years are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income taxes at statutory federal rate ... $ 586,777 $ 501,876 $ 333,002
Increases (decreases) resulting from:
Tax exempt interest, net ................. (133,013) (114,380) (106,748)
State income taxes, net of federal benefit 68,432 38,085 --
Other .................................... 17,700 25,139 (27,897)
---------- ---------- ----------
$ 539,896 $ 450,720 $ 198,357
========== ========== ==========
</TABLE>

F-16
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- INCOME TAX MATTERS -- (Continued)

Deferred tax assets and liabilities arising from temporary differences at
December 31, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets relating to:
Bad debt reserves .............................. $ 351,135 $ 311,784
Deferred compensation .......................... 35,226 16,112
Other .......................................... -- 3,589
---------- ----------
Total deferred tax asset ............................... 386,361 331,485
---------- ----------
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale(205,044) (162,547)
Depreciation ................................... (46,762) (46,618)
Deferred loans fees and costs .................. (137,244) (87,513)
Basis difference in equity investment .......... (31,200) (31,200)
Other .......................................... (10,330) --
---------- ----------
Total deferred tax liability ........................... (430,580) (327,878)
---------- ----------
Net deferred tax asset (liability) ..................... $ (44,219) $ 3,607
========== ==========
</TABLE>

The net deferred tax asset or liability is included in other assets or
liabilities, as appropriate, on the accompanying consolidated balance sheets.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

The Bank's risk of loss with the unfunded loans and lines of credit or
standby letters of credit is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making commitments under
such instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Credit card commitments are unsecured. As of December 31, 1997 and 1996,
outstanding financial instruments whose contract amounts represent credit risk
were as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Commitments to extend credit ..... $14,476,645 $13,108,188
Credit card commitments .......... 3,086,572 1,913,015
Standby letters of credit ........ 763,388 348,388
----------- -----------
$18,326,605 $15,369,591
=========== ===========
</TABLE>

CONTINGENCIES

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

F-17
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- COMMITMENTS AND CONTINGENCIES -- (Continued)

FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK

The Bank makes commercial, agricultural, real estate mortgage, home equity
and consumer loans primarily in Stanly County. A substantial portion of the
Bank's customers' abilities to honor their contracts is dependent on the
business economy in Albemarle, North Carolina and surrounding areas. Although
the Bank's loan portfolio is diversified, there is a concentration of mortgage
loans in the portfolio. The Bank's policies for real estate lending require
collateralization with 20% equity or that the loan be underwritten to conform
to Fannie-Mae guidelines that would allow securitization and/or sale of the
loans. Lending policy for all loans requires that they be supported by
sufficient cash flows. Credit losses related to this real estate concentration
are consistent with credit losses experienced in the portfolio as a whole.

NOTE 12 -- RELATED PARTY TRANSACTIONS

In the normal course of business, certain directors and executive officers
of the Company, including their immediate families and companies in which they
have a 10% or more beneficial interest, were loan customers. Loans to such
groups totaled $5,621,593 and $2,727,314 at December 31, 1997 and 1996 as
summarized below.

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Balance, beginning .............. $ 2,727,314 $ 4,234,445
Loans made ...................... 9,445,168 7,771,662
Payments received ............... (6,892,743) (7,976,645)
Changes in composition .......... 341,854 (1,302,148)
------------ ------------
Balance, ending ................. $ 5,621,593 $ 2,727,314
============ ============
</TABLE>

At December 31, 1997, the Bank had pre-approved but unused credit lines
totaling $470,775 to executive officers, directors and their affiliates.

NOTE 13 -- REGULATORY RESTRICTIONS

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

North Carolina law prohibits Uwharrie Capital Corp from making any
distributions to shareholders, including the payment of cash dividends, which
would render it insolvent or unable to meet its obligations as they become due
in the ordinary course of business. At December 31, 1997, Uwharrie Capital Corp
had consolidated shareholders' equity of $12,534,136.

As a North Carolina banking corporation, the subsidiary bank may pay
dividends only out of undivided profits as determined pursuant to North
Carolina General Statutes Section 53-87. As of December 31, 1997, the Bank had
undivided profits of $5,769,268 and total capital of $12,409,047.

The Company and its subsidiary bank are subject to federal regulatory
risk-based capital guidelines for banks and bank holding companies. Both must
meet specific capital guidelines that involve quantitative measure of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices which measure Total and Tier 1 Capital to risk- weighted
assets and Tier 1 Capital to average assets. Quantitative measures established
by regulation to ensure capital adequacy and the Company's consolidated capital
ratios are set forth in the table below. The Company expects to meet

F-18
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- REGULATORY RESTRICTIONS -- (Continued)

or exceed these minimums without altering current operations or strategy. The
following table presents certain measures of the Company's regulatory capital
at the dates indicated together with the levels required to be considered
"adequately capitalized" and "well capitalized" under current regulatory
guidelines:

<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
---------- ------------- ------------
<S> <C> <C> <C>
As of December 31, 1997:
Total Capital (to risk weighted assets) 13.6% 8% 10%
Tier 1 Capital (to risk weighted assets) 12.5 4 6
Tier 1 Capital (to average assets) .. 8.4 4 5
As of December 31, 1996:
Total Capital (to risk weighted assets) 14.0% 8% 10%
Tier 1 Capital (to risk weighted assets) 12.8 4 6
Tier 1 Capital (to average assets) .. 8.2 4 5
</TABLE>

As of December 31, 1997, the most recent notification from the FDIC
categorized the bank subsidiary as adequately capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Bank's category.

For the reserve maintenance period in effect at December 31, 1997, the
subsidiary bank was required to maintain reserve balances in cash or on deposit
with the Federal Reserve Bank in the aggregate amount of $925,000 as reserves
on deposit liabilities.

NOTE 14 -- STOCK MATTERS

EMPLOYEE STOCK PLANS

During 1996, the Company adopted the 1996 Employment Stock Option Plan
("SOP") and the Employee Stock Purchase Plan ("SPP"), under which options to
purchase shares of the Company's common stock may be granted to officers and
eligible employees. Options granted under the SOP are exercisable in
established increments according to vesting schedules, and will expire if not
exercised within ten years of the date of grant. Options granted under the SPP
are fully vested at the date of grant and will expire if not exercised within
two years.

Under a prior Incentive Stock Option Plan, various grants were awarded
during the period from October 1985 through January 1990. All remaining
unexercised options under that plan were exercised in either 1997 or 1996.

Activity under all option plans, including the effects of the 5% stock
dividend issued in 1997 and the 3% stock dividends issued in 1996 and 1995, are
as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at the beginning of the year ..... 140,820 $ 5.80 38,941 $ 4.28 69,928 $ 3.67
Increase for stock dividend .......................... 6,964 -- 42 -- 1,136 --
Options granted ...................................... 47,220 7.31 144,687 5.83 --
Options exercised .................................... (3,152) 4.72 (42,850) 4.52 (32,123) 2.79
------- ------- ------- ------- ------- -------
Options outstanding at the end of the year ........... 191,852 $ 5.86 140,820 $ 5.80 38,941 $ 4.28
======= ======= ======= ======= ======= =======
Options exercisable at the end of the year ........... 66,028 $ 5.71 21,105 $ 5.66 38,941 $ 4.28
======= ======= ======= ======= ======= =======
Weighted-average fair value of options granted
during the year ...................................... $ 1.78 $ 1.15 $ --
======= ======= =======
</TABLE>

F-19
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- STOCK MATTERS -- (Continued)

At December 31, 1997, there were options for 191,852 shares outstanding
with a weighted-average remaining term of eight years and an exercise price of
between $5.55 and $7.38 per share. At December 31, 1997, 66,028 optioned shares
were exercisable at prices between $5.55 and $7.38 per share for a total of
$376,880. When options are exercised, par value of the shares issued is
recorded as an addition to common stock, and the remainder of the proceeds is
credited to additional paid-in capital. No income or expense has been
recognized in connection with the grant or exercise of these options.

As permitted by SFAS No. 123, the Company has continued to apply APB
Opinion No. 25 for measurement of stock-based compensation in the accompanying
financial statements. If the Company had used the fair value based method of
accounting for stock-based compensation, operating results for 1997 and 1996
would have been affected as set forth below:

<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------------------- -----------------------------
1997 1996 1997 1996
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net Income ................ $ 1,185,920 $ 1,025,389 $ 1,118,920 $ 971,389
Net Income Per Share:
Basic ..................... $ 0.26 $ 0.22 $ 0.25 $ 0.21
Assuming Dilution ......... $ 0.25 $ 0.22 $ 0.24 $ 0.21
</TABLE>

In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes Option
Pricing Model using the following assumptions; a risk-free interest rate of
5.5% and 6.0% in 1997 and 1996, respectively, a dividend yield of 2.0%, an
expected life equal to 60% of the term of the option, and a volatility ratio of
20%. The effects of applying SFAS No. 123 in the above pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to 1996.

STOCK REPURCHASE PROGRAM

On February 21, 1995, the Company's Board of Directors authorized and
approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to
which the Company may repurchase shares of the Company's common stock for the
primary purpose of providing liquidity to its shareholders. During the years
1997 and 1996, the Company was authorized to purchase and retire shares up to
an aggregate purchase price of $900,000 annually. Pursuant to stock repurchase
authorizations and limitations, the Company purchased 4,018 shares during 1997
and 54,565 shares during 1996 with an aggregate purchase price of $30,125 and
$351,889, respectively.

NOTE 15 -- EMPLOYEE AND DIRECTOR BENEFIT PLANS

EMPLOYEES' SAVINGS PLUS AND PROFIT SHARING PLAN

The Company has established an associate tax deferred savings plan under
Section 401(k) of the Internal Revenue Code of 1986. All associates who are
scheduled to work 1,000 hours or more are eligible to participate upon
completion of one year of employment.

The Company's annual contribution to the plan was $113,099 in 1997 and
$104,876 in 1996, determined as follows:

o One percent of each participant's compensation.

o A matching contribution equivalent to 100% of the first 5% of each
associate's compensation contributed to the plan.

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

DIRECTORS' DEFERRED COMPENSATION PLAN

The Company has established a Directors Deferred Compensation Plan in
accordance with the laws of the State of North Carolina. Each Director may
elect to defer receipt for services rendered to the Company as a Director
during the term of his or her service by entering into a written deferred
compensation election. The balance in deferred directors compensation was
$90,046 and $41,312 at December 31, 1997 and 1996, respectively.

F-20
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16 -- NEW ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB
issued SFAS No. 130. This Statement establishes standards of reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. In addition to net income as has been
historically determined, comprehensive income for the Company would include
unrealized holding gains and losses on available for sale securities. This
Statement will be effective for the first quarter of the Company's fiscal year
ending December 31, 1998. Had the Company early-adopted this Statement, it
would have reported comprehensive income of $1,252,056 and $765,157 for the
years ended December 31, 1997 and 1996, respectively.

NOTE 17 -- FAIR VALUES OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK

The following table reflects a comparison of carrying amounts and the
estimated fair value of the financial instruments as of December 31.

<TABLE>
<CAPTION>
1997 1996
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents ................... $ 4,506 $ 4,506 $ 4,883 $ 4,883
Securities available for sale ............... 23,847 23,847 25,220 25,220
Variable rate loans ......................... 63,570 63,570 59,860 59,860
Other loans ................................. 50,415 51,024 40,992 40,908
-------- -------- -------- --------
Total loans ................................. 113,985 114,594 100,852 100,768
-------- -------- -------- --------
Accrued interest receivable ................. 931 931 858 858
FINANCIAL LIABILITIES
Deposits
Variable rate, payable on demand .......... $ 74,312 $ 74,312 $ 64,672 $ 64,672
Fixed-rate time certificates of deposit ..... 42,593 42,642 39,927 39,969
-------- -------- -------- --------
Total deposits ............................ 116,905 116,954 104,599 104,641
-------- -------- -------- --------
Short-term borrowing ........................ 8,009 8,009 11,156 11,156
Long-term debt .............................. 7,575 7,575 6,266 6,349
Accrued interest payable .................... 171 171 176 176
</TABLE>

At December 31, 1997 the Bank had outstanding standby letters of credit
and commitments to extend credit. These off-balance sheet financial instruments
are generally exercisable at the market rate prevailing at the date the
underlying transaction will be completed, and, therefore, they were deemed to
have no current fair market value. See Note 11.

It should be noted that the estimated fair values disclosed in this 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.

INTEREST RATE RISK

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

F-21
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks .............................................................. $ 4,003,474 $ 4,455,348
Due from banks, interest-bearing ..................................................... 502,349 219,452
Federal funds sold ................................................................... 925,000 --
Investment securities available for sale, at fair value .............................. 27,493,176 25,904,101
Loans ................................................................................ 117,624,959 108,731,008
Less allowance for loan losses ....................................................... (1,162,471) (1,099,681)
------------ ------------
Net loans ........................................................................... 116,462,488 107,631,327
------------ ------------
Premises and equipment, net .......................................................... 2,428,658 2,356,603
Interest receivable .................................................................. 973,004 909,595
Other assets ......................................................................... 1,212,549 1,142,973
------------ ------------
Total assets ...................................................................... $154,000,698 $142,619,399
============ ============
LIABILITIES
Deposits
Demand, noninterest-bearing ......................................................... $ 16,109,047 $ 14,162,047
Money market and NOW accounts ....................................................... 28,123,335 29,671,626
Savings accounts .................................................................... 33,669,537 29,164,678
Time deposits, $100,000 and over .................................................... 16,897,663 8,037,936
Other time deposits ................................................................. 33,175,775 32,442,485
------------ ------------
Total deposits ....................................................................... 127,975,357 113,478,772
Federal funds purchased and securities sold under repurchase agreements .............. 3,778,110 4,817,305
Other short-term borrowed funds ...................................................... 1,339,000 4,239,000
Long-term debt ....................................................................... 6,951,233 7,700,484
Interest payable ..................................................................... 146,256 190,358
Other liabilities .................................................................... 534,369 321,099
------------ ------------
Total liabilities ................................................................. 140,724,325 130,747,018
Off balance sheet items, commitments and contingencies -- Note 4
SHAREHOLDERS' EQUITY
Common stock, $1.25 par value
6,000,000 shares authorized; shares issued and outstanding of 2,294,536 and
2,172,506, respectively ............................................................. 2,868,170 2,715,633
Additional paid-in capital ........................................................... 5,578,035 4,572,216
Undivided profits .................................................................... 4,495,660 4,364,497
Accumulated other comprehensive income ...............................................
Net unrealized gain on securities available for sale, net of related tax effect ..... 334,508 220,035
------------ ------------
Total shareholders' equity ........................................................ 13,276,373 11,872,381
------------ ------------
Total liabilities and shareholders' equity ........................................ $154,000,698 $142,619,399
============ ============
</TABLE>

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

F-22
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees ....................................................... $ 4,945,374 $ 4,537,397
Investment securities
U. S. Treasury ............................................................ 152,253 138,566
U. S. Government agencies and corporations ................................ 466,534 478,199
State and political subdivisions .......................................... 165,259 170,608
Other ..................................................................... 39,099 36,499
Short-term investments ...................................................... 18,772 15,504
----------- -----------
Total interest income ..................................................... 5,787,291 5,376,773
----------- -----------
INTEREST EXPENSE
Time deposits, $100,000 and over ............................................ 332,217 187,625
Other interest-bearing deposits ............................................. 1,824,568 1,738,032
Federal funds purchased and securities sold under repurchase agreements ..... 119,377 135,164
Other short-term borrowed funds ............................................. 71,987 90,447
Long-term debt .............................................................. 181,650 233,005
----------- -----------
Total interest expense .................................................... 2,529,799 2,384,273
----------- -----------
NET INTEREST INCOME .......................................................... 3,257,492 2,992,500
Provision for loan losses .................................................... 64,852 84,600
----------- -----------
Net interest income after provision for loan losses .......................... 3,192,640 2,907,900
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts ......................................... 463,404 449,196
Other service fees and commissions .......................................... 280,338 248,768
Gains on securities sold .................................................... 1,453 --
Other income ................................................................ 15,244 29,295
----------- -----------
Total noninterest income .................................................. 760,439 727,259
----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits .............................................. 1,598,313 1,369,576
Net occupancy expense ....................................................... 141,298 117,364
Equipment expense ........................................................... 216,748 199,591
Data processing costs ....................................................... 218,885 243,590
Other operating expense ..................................................... 823,205 795,142
----------- -----------
Total noninterest expenses ................................................ 2,998,449 2,725,263
----------- -----------
Income before income taxes ................................................... 954,630 909,896
Income taxes ................................................................. 297,233 283,454
----------- -----------
NET INCOME ................................................................... $ 657,397 $ 626,442
=========== ===========
NET INCOME PER COMMON SHARE
Basic ....................................................................... $ .14 $ .14
Assuming dilution ........................................................... .14 .13
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ....................................................................... 4,576,614 4,564,862
Assuming dilution ........................................................... 4,737,412 4,670,117
</TABLE>

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

F-23
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------------- PAID-IN UNDIVIDED COMPREHENSIVE
SHARES AMOUNT CAPITAL PROFITS INCOME TOTAL
------------- -------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 ......... 2,174,982 $ 2,718,728 $4,593,661 $3,738,055 $ 252,961 $11,303,405
Comprehensive income
Net income ........................ -- -- -- 626,442 -- 626,442
Other comprehensive income,
net of tax ......................
Net increase (decrease) in fair
value of securities available
for sale ....................... -- -- -- -- (32,926) (32,926)
-----------
Total comprehensive income ........ 593,516
Stock options exercised ............ 1,542 (1,928) (36,577) -- -- (5,585)
Repurchases of common stock ........ (4,018) 5,023 25,102 -- -- 30,125
--------- ----------- ---------- ---------- --------- -----------
BALANCE AT JUNE 30, 1997 ........... 2,172,506 $ 2,715,633 $4,572,216 $4,364,497 $ 220,035 $11,872,381
========= =========== ========== ========== ========= ===========
BALANCE AT JANUARY 1, 1998 ......... 2,282,078 $ 2,852,598 $5,524,178 $3,838,263 $ 319,097 $12,534,136
Comprehensive income
Net income ........................ -- -- -- 657,397 -- 657,397
Other comprehensive income,
net of tax ......................
Net increase (decrease) in fair
value of securities available
for sale ....................... -- -- -- -- 15,411 15,411
-----------
Total comprehensive income ........ 672,808
Stock options exercised ............ 12,458 15,572 53,857 -- -- 69,429
--------- ----------- ---------- ---------- --------- -----------
BALANCE AT JUNE 30, 1998 ........... 2,294,536 $ 2,868,170 $5,578,035 $4,495,660 $ 334,508 $13,276,373
========= =========== ========== ========== ========= ===========
</TABLE>

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

F-24
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................. $ 657,397 $ 626,442
Adjustments to reconcile net income to net cash provided by operations:
Depreciation ............................................................. 138,727 125,970
Amortization of investment premiums and discounts, net ................... 21,789 (11,509)
Provision for loan losses ................................................ 64,852 84,600
Deferred income tax benefit .............................................. -- (7,260)
Gain on sale of securities available for sale, net ....................... (1,453) --
(Gain) loss on sale of foreclosed properties ............................. 14,288 --
Net change in interest receivable .......................................... (42,501) (51,800)
Net change in other assets ................................................. 3,382 (98,499)
Net change in income taxes receivable ...................................... (47,516) 20,261
Net change in interest payable ............................................. (24,775) 14,316
Net change in income taxes payable ......................................... -- 10,015
Net change in accrued and other liabilities ................................ 14,902 (63,788)
------------ ------------
Net cash provided by operating activities ................................ 799,092 648,748
------------ ------------
INVESTING ACTIVITIES
Net (increase) decrease in due from banks, interest-bearing ................ (318,838) 80,042
Proceeds from sales of securities available for sale ....................... -- 571,301
Proceeds from maturities of securities available for sale .................. 2,566,893 3,017,099
Purchase of securities available for sale .................................. (6,208,300) (4,314,639)
Net (increase) decrease in federal funds sold .............................. (925,000) --
Net increase (decrease) in loans made to customers ......................... (3,667,416) (7,913,310)
Purchase of premises and equipment ......................................... (223,648) (365,324)
Proceeds from sales of/(additions to) foreclosed properties ................ 34,211 (42,000)
------------ ------------
Net cash used by investing activities .................................... (8,742,098) (8,966,831)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposit accounts ............................................ 11,070,033 8,879,308
Net increase (decrease) in federal funds purchased ......................... (1,400,000) 935,000
Net increase (decrease) in securities sold under repurchase agreements ..... (269,220) (4,273,840)
Repayment of short-term borrowed funds ..................................... (1,223,058) 1,239,000
Proceeds from long-term advances from Federal Home Loan Bank ............... 2,000,000 2,000,000
Repayment of long-term advances from Federal Home Loan Bank ................ (2,623,276) (565,176)
Repurchases of common stock ................................................ -- (30,124)
Proceeds from issuance of common stock ..................................... 69,430 5,585
------------ ------------
Net cash provided by financing activities ................................ 7,623,909 8,189,753
------------ ------------
DECREASE IN CASH AND DUE FROM BANKS ......................................... (319,097) (128,330)
Cash and due from banks at beginning of period ............................. 4,322,571 4,583,678
------------ ------------
Cash and due from banks at end of period ................................... $ 4,003,474 $ 4,455,348
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid .............................................................. $ 2,554,573 $ 2,369,957
Income taxes paid .......................................................... 339,000 306,878
</TABLE>

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

F-25
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

All adjustments considered necessary for a fair presentation of the
results for interim periods presented have been included (such adjustments are
normal and recurring in nature). Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The accompanying unaudited
interim consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included elsewhere herein.

NOTE 2 -- PER SHARE DATA

On July 21, 1998, the Company's Board of Directors declared a two-for-one
stock split, effected in the form of a dividend, whereby all shareholders will
receive an additional share of common stock for each share of stock currently
held. The dividend is payable on August 20, 1998 to shareholders of record on
August 4, 1998. All information presented in the accompanying interim
consolidated financial statements regarding earnings per share and weighted
average number of shares outstanding has been computed giving effect to this
stock dividend, and, where applicable, to the 5% stock dividend paid in 1997
and to the 3% stock dividend paid in 1996.

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Weighted average number of common shares used in computing basic
earnings per share ............................................... 4,576,614 4,564,862
Effect of dilutive stock options ................................... 160,798 105,255
--------- ---------
Weighted average number of common shares and dilutive potential
common shares used in computing diluted earnings per share ....... 4,737,412 4,670,117
========= =========
</TABLE>

NOTE 3 -- COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during the period for
non-owner transactions and is divided into net income and other comprehensive
income. Other comprehensive income includes revenues, expenses, gains, and
losses that are excluded from earnings under current accounting standards. This
statement does not change or modify the reporting or display in the income
statement. The Company has adopted SFAS No. 130 effective January 1, 1998.
Comparative financial statements for the six months ended June 30, 1997, also
reflect the application of this statement.

NOTE 4 -- COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

F-26
<PAGE>

UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 4 -- COMMITMENTS AND CONTINGENCIES -- (Continued)

evaluation of the borrower. Collateral held varies, but may include accounts
receivable, inventory, real estate and time deposits with financial
institutions. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Credit card commitments are unsecured. At June 30,
1998, outstanding financial instruments whose contract amounts represent credit
risk were approximately:

<TABLE>
<S> <C>
Commitments to extend credit ..... $ 14,216,000
Credit card commitments .......... 3,211,000
Standby letters of credit ........ 763,000
------------
$ 18,190,000
============
</TABLE>

CONTINGENCIES

FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK

F-27
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS ANY TIME SUBSEQUENT TO ITS DATE.

--------------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary .................................... 2
Risk Factors .......................................... 5
Use of proceeds ....................................... 7
Offering Price of Common Stock ........................ 7
Dividends ............................................. 8
Capitalization ........................................ 9
Selected Consolidated Financial Data .................. 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 11
Business .............................................. 23
Management ............................................ 34
Description of Capital Stock .......................... 36
Self-Managed Stock Offering ........................... 39
Legal Matters ......................................... 39
Experts ............................................... 39
Available Information ................................. 39
Incorporation of Certain Documents by Reference........ 39
Forward Looking Statements ............................ 40
Index to Consolidated Financial Statements ............ F-1
</TABLE>

UP TO 850,000 SHARES

Uwharrie Capital Corp

COMMON STOCK

--------------------------
PROSPECTUS
--------------------------
, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses of the Company payable in
connection with the issuance and distribution of the Common Stock being
registered hereby. All expenses of the offering will be borne by the Company.
The Common Stock will not be listed or traded on a broker-dealer market, and
therefore neither underwriting discounts nor commissions will be incurred. All
amounts shown are estimates, except the SEC registration fee:

<TABLE>
<S> <C>
SEC Registration Fee ................ $ 1,441.81
Printing and Engraving Expenses ..... $ 35,000.00
Legal Fees and Expenses ............. $ 90,000.00
Accounting Fees ..................... $ 30,000.00
The Meritas Group, Inc. ............. $ 80,000.00
Miscellaneous Expenses .............. $ 7,500.00
Total ............................... $ 243,947.81
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was,
is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative, or investigative, because of the fact that such person was a
director, officer, agent or employee of the corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. This indemnity may include the obligation to
pay any judgment, settlement, penalty, fine (including an excise tax assessed
with respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of
directors, a committee of directors, special legal counsel or the shareholders
in accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right
of the corporation in which the director was adjudged liable to the corporation
or in connection with a proceeding in which a director was adjudged liable on
the basis of having received an improper personal benefit.

In addition to, and separate and apart from the indemnification described
above under the statutory scheme, Section 55-8-57 of the North Carolina General
Statutes permits a corporation to indemnify or agree to indemnify any of its
directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation.
The Bylaws provide for indemnification to the fullest extent permitted under
North Carolina law for persons who serve as directors or officers of the
Company, or at the request of the Company serve as an officer, director, agent,
partner, trustee, administrator or employee for any other foreign or domestic
entity, except to the extent such activities were at the time taken known or
believed by the potential indemnities to be clearly in conflict with the best
interests of the Company. Accordingly, the Company may indemnify its directors,
officers or employees in accordance with either the statutory or nonstatutory
standards.

Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes
require a corporation, unless its articles of incorporation provide otherwise,
to indemnify a director or officer who has been wholly successful, on the
merits or otherwise, in the defense of any proceeding to which such director or
officer was a party. Unless prohibited by the articles of incorporation, a
director or officer also may make application and obtain court-ordered
indemnification if the court determines that such director or officer is fairly
and reasonably entitled to such indemnification as provided in Sections 55-8-54
and 55-8-56.

Finally, Section 55-8-57 of the North Carolina General Statutes provides
that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain

II-1
<PAGE>

liabilities incurred by such persons, whether or not the corporation is
otherwise authorized by the North Carolina Business Corporation Act to
indemnify such party. The Company has purchased a standard directors' and
officers liability policy which will, subject to certain limitations, indemnify
the Company and its officers and directors for damages they become legally
obligated to pay as a result of any negligent act, error, or omission committed
by directors or officers which acting in their capacity as such.

The Company's Bylaws also contain an indemnification provision. Article X
of the Company's Bylaws provides that any person who at any time serves or has
served as a director or officer of the Company, or who, while serving as a
director or officer of the Company, serves or has served at the request of the
Company as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or as a
trustee or administrator under an employee benefit plan, shall have a right to
be indemnified by the Company to the fullest extent permitted by law against
(a) reasonable expenses, including attorneys' fees, incurred by him in
connection with any threatened, pending or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Company,
seeking to hold him liable by reason of the fact that he is or was acting in
such capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan) or penalty for which he may have become liable in any
such action, suit or proceeding, or in connection with a settlement approved by
the Board of Directors of any such action, suit or proceeding.

The Board of Directors of the Company shall take all such action as may be
necessary and appropriate to authorize the Company to pay the indemnification
required by this bylaw, including, without limitation, making a good faith
determination as to whether indemnification is legally permissible in the
circumstances and a good faith evaluation of the manner in which the claimant
for indemnity acted and of the reasonable amount of indemnity due him. The
Board of Directors may appoint a committee or special counsel to make such
determination and evaluation. To the extent needed, the Board shall give notice
to, and seek approval by, the shareholders of the Company for any decision to
indemnify.

Any person who at any time after the adoption of this bylaw serves or has
served in the aforesaid capacity for or on behalf of the Company shall be
deemed to be doing or to have done so in reliance upon, and as consideration
for, the right of indemnification provided herein. Such right shall inure to
the benefit of the legal representatives of any such person and shall not be
exclusive of any other rights to which such person may be entitled apart from
the provisions of this bylaw.

As permitted by North Carolina law, Article V of the Articles limits the
personal liability of directors for monetary damages for breaches of any duty
as a director arising out of any legal action whether by or in the right of the
Company, its shareholders, or otherwise. Such limitation will not apply to (i)
acts or omissions not made in good faith that the director at the time of the
breach knew or believed were in conflict with the best interests of the
Company, (ii) any liability under Section 55-8-33 of the General Statutes of
North Carolina, (iii) any transaction from which the director derived an
improper personal benefit, or (iv) acts or omissions occurring prior to the
date the provision became effective.

ITEM 16. EXHIBITS

The following documents (unless indicated) are filed herewith and made a
part of this Registration Statement.

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------- -----------------------------------------------------------------------
<S> <C>
4.01(1) Specimen Common Stock Certificate.
5.01 Form of Opinion of Moore & Van Allen, PLLC.
10.01(2) 1996 Employment Stock Option Plan.
10.02(2) 1996 Employee Stock Purchase Plan.
10.03 Directors Deferred Compensation Plan.
23.01 Consent of Dixon Odom PLLC.
23.02 Consent of Moore & Van Allen, PLLC. (included in Exhibit 5.01 hereto).
24.01 Powers of Attorney (see pages II-4 and II-5).
27.01 Financial Data Schedule (for SEC use only).
99.01 Appraisal Report of The Meritas Group, Inc. (to be filed by amendment)
99.02 Form of Promissory Note to be used in Installment Purchase Plan.
</TABLE>

- ---------
(1) Incorporated by reference to Registrant's Form 8-K dated July 1, 1993 filed
with the SEC.

(2) Incorporated by reference to Registrant's Registration Statement on Form
S-8 dated May 3, 1996 filed with the SEC.

II-2
<PAGE>

ITEM 17. UNDERTAKINGS

1. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

3. The undersigned Registrant hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424 (b) ( I ) or (4) or 497 (h) under
the Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective; and (b) for the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bone fide offering
thereof.

4. The undersigned registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (Section 230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such informaiton in the registration statement.

II-3
<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Albemarle, State of North Carolina, on August 5,
1998.

UWHARRIE CAPITAL CORP

/s/ ROGER L. DICK*
----------------------------------------
ROGER L. DICK

PRESIDENT AND CHIEF EXECUITVE OFFICER

SIGNATURES AND POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roger L. Dick and Ronald B. Davis, or either of
them, each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement, to
sign any related abbreviated Registration Statement filed pursuant to Rule
462(b) of the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on August 5,
1998, in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- -------------------------------------- ---------------------------------------------------------------
<S> <C>
/s/ ROGER L. DICK President and Chief Executive Officer and Director (Principal
- ----------------------------------
ROGER L. DICK Executive Officer)
/s/ BARBARA S. WILLIAMS Senior Vice President -- Finance (Principal Financial Officer)
- ----------------------------------
BARBARA S. WILLIAMS
/s/ WILLIAM S. ALDRIDGE, JR. Chairman
- ----------------------------------
WILLIAM S. ALDRIDGE, JR.
/s/ CYNTHIA H. BEANE Vice Chairman
- ----------------------------------
CYNTHIA H. BEANE
/s/ JOE S. BROOKS Director
- ----------------------------------
JOE S. BROOKS
/s/ RONALD T. BURLESON Director
- ----------------------------------
RONALD T. BURLESON
/s/ BILL C. BURNSIDE, DDS Director
- ----------------------------------
BILL C. BURNSIDE, DDS
/s/ GAIL C. BURRIS Director
- ----------------------------------
GAIL C. BURRIS
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- -------------------------------------- ---------
<S> <C>
/s/ G. CHAD EFIRD Director
- ----------------------------------
G. CHAD EFIRD
/s/ JAMES F. LINK, D.V.M. Director
- ----------------------------------
JAMES F. LINK, D.V. M.
/s/ DAVID M. JONES Director
- ----------------------------------
DAVID M. JONES
/s/ W. CHESTER LOWDER Director
- ----------------------------------
W. CHESTER LOWDER
/s/ BUREN MULLIS Director
- ----------------------------------
BUREN MULLIS
/s/ JOHN P. MURRAY, M.D. Director
- ----------------------------------
JOHN P. MURRAY, M.D.
/s/ KENT E. NEWPORT Director
- ----------------------------------
KENT E. NEWPORT
/s/ CATHERINE A. PICKLER Director
- ----------------------------------
CATHERINE A. PICKLER
/s/ GEORGE T. REAVES Director
- ----------------------------------
GEORGE T. REAVES
/s/ A. JAMES RUSSELL Director
- ----------------------------------
A. JAMES RUSSELL
/s/ B. A. SMITH, JR. Director
- ----------------------------------
B. A. SMITH, JR.
/s/ DOUGLAS V. WADDELL Director
- ----------------------------------
DOUGLAS V. WADDELL
</TABLE>

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------- -----------------------------------------------------------------
<S> <C>
5.01 Form of Opinion of Moore & Van Allen, PLLC.
10.03 Directors Deferred Compensation Plan.
23.01 Consent of Dixon Odom PLLC.
27.01 Financial Data Schedule (for SEC use only)
99.02 Form of Promissory Note to be used in Installment Purchase Plan.
</TABLE>

II-6
<PAGE>

For Bank Use (Do Not Fill In)
No. of Shares Requested
No. of Shares Accepted

UWHARRIE CAPITAL CORP
ALBEMARLE, NORTH CAROLINA
The undersigned, having received and reviewed the Prospectus dated ,
1998, of Uwharrie Capital Corp, a North Carolina bank holding company, and in
sole reliance on the information contained therein, hereby subscribes for
shares of the Common Stock (par value $ 1.25 per share) of Uwharrie
Capital Corp at a price of $ per share. The minimum subscription is 200
shares and the maximum is 25,000 shares.

The subscription is payable as follows:

(i) the sum of $ is paid herewith, in United States dollars either by
check, draft or money order drawn to the order of Uwharrie Capital Corp;

(ii) the sum of $ is paid herewith through withdrawals from my Bank of
Stanly certificate or savings account(s) shown below, which I hereby authorize
Bank of Stanly to make with the express understanding that the amounts
withdrawn are without premature withdrawal penalty and are otherwise not
available for withdrawal:

<TABLE>
<S> <C>
ACCOUNT NUMBER(S) AMOUNT(S)

TOTAL WITHDRAWAL:
</TABLE>

OR
(iii) the purchase of shares (not to exceed 500 shares) under the
Purchase Plan described in the Prospectus. (If this option is selected, an
appropriate financing form will be forwarded.)

1. This Subscription Offer may not be canceled, terminated or revoked by the
undersigned.

2. The Board of Directors reserves the right to accept this Subscription Offer
for a lesser number of shares than the number noted above, or to reject it
altogether, for any reason or no reason, whether or not the subscriptions of
other subscribers are treated differently. Subscriptions may be accepted at any
time. Uwharrie Capital Corp also reserves the right to cancel accepted
Subscription Offers for any reason or no reason until the date the shares
purchased through this Subscription Offering are issued. Acceptances must be in
writing and are legally effective and binding when mailed to the address shown
on this Subscription Offer, or in the case of a subscriber whose address has
changed and who has provided the new address to Uwharrie Capital Corp in
writing, to the new address. If the subscription is accepted in part, the
undersigned agrees to purchase the accepted number of shares subject to the
terms of this Subscription Offer. A refund, with no interest or income thereon,
will be made of all amounts received for subscriptions not accepted.

3. All terms of the Prospectus of Uwharrie Capital Corp dated , 1998, are
incorporated herein by reference. The undersigned has read the Prospectus and
understood it, or has had it explained to him/her by his/her legal
representative, and acknowledges the terms and conditions under which this
Subscription Offering is made as more fully set forth in the Prospectus. In
making a decision to purchase such shares, the undersigned is relying solely
upon the representations contained in the Prospectus, and confirms by his/her
signature below that this Subscription Offer is made in accordance therewith.
<PAGE>

4. By his/her initials below, the subscriber acknowledges and agrees that:

(1) THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY OR PERSON AND
ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL; (2)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
EXCHANGE COMMISSION, THE NORTH CAROLINA SECRETARY OF STATE, OR ANY OTHER
REGULATORY BODY, NOR HAS ANY REGULATORY BODY PASSED ON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS, AND THAT ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL;
AND (3) SUBSCRIBER HAS RECEIVED AND READ A COPY OF THE PROSPECTUS BEFORE
SIGNING THIS SUBSCRIPTION OFFER.

INSTRUCTION: Each subscriber must place his/her initials on the line below
to indicate that he/she has read the above paragraph.

(Subscriber's Initials) (Subscriber's Initials)

Subscriber has signed this Subscription Offer on the date indicated beside
his/her signature below, and hereby requests that certificates evidencing
shares of Common Stock purchased pursuant to this Subscription Offer be
registered in the name and form of ownership described below.

___________(SEAL)________, 1998 ____________________(SEAL)__________, 1998
Signature Date Additional Signature Date
(if required)

COMPLETE ALL BLANKS ON THIS SUBSCRIPTION OFFER, AND IF APPLICABLE, MAKE CHECK
OR MONEY ORDER IN THE AMOUNT OF $ FOR EACH SHARE SUBSCRIBED PAYABLE TO
UWHARRIE CAPITAL CORP AND MAIL SUBSCRIPTION AND CHECK IN THE ENCLOSED ENVELOPE
ADDRESSED TO:

UWHARRIE CAPITAL CORP
167 NORTH SECOND STREET
POST OFFICE BOX 338
ALBEMARLE, NORTH CAROLINA 28002-0338
(704) 983-6181

Any questions concerning subscriptions or the Subscription Offering may be
directed to the "Stock Information Center" at the above address and telephone
number.

PURCHASER INFORMATION

THIS INFORMATION IS NECESSARY, AND THE FAILURE TO PROVIDE MAY RESULT IN A
REJECTION OF THE PURCHASER'S SUBSCRIPTION ORDER.

<TABLE>
<S> <C>
A. -- EXISTING SHAREHOLDERS. Check here if you were an existing shareholder of Uwharrie Capital Corp
as of , 1998.
B. -- EXISTING CUSTOMER OF THE Check here if you were an existing customer of the Bank of Stanly or its
BANK OF STANLY OR ITS SUBSIDIARIES, THE subsidiaries, The Strategic Alliance and BOS Agency, Inc., as of
STRATEGIC ALLIANCE AND BOS AGENCY, INC. , 1998.
</TABLE>

<PAGE>

C. -- INDIVIDUALS RESIDING IN THE UWHARRIE LAKES REGION. Check here if you
reside in the Uwharrie Lakes Region (consisting of Stanly,
Montgomery, Richmond, Anson, Union, Cabarrus, Rowan, Randolph, and
Davidson Counties), and if so, provide the address of such
residence immediately below:

Street Address

City State Zip Code

D. -- INDIVIDUALS HAVING A PLACE OF BUSINESS OR PROPERTY INTEREST IN THE
UWHARRIE LAKES REGION. Check here if you have a place of
business or property interest in the Uwharrie Lakes Region, and if
so, provide the name and address of such business or property
interest and your mailing address as indicated below:

Address of Business or Property Interest:

Street Address

City State Zip Code

Mailing Address:

Street Address

City State Zip Code

E. -- OTHER. Explain:-------------------------------------------------

------------------------------------------------------
STOCK REGISTRATION INFORMATION

PLEASE PRINT

Name(s) in which stock is to be registered

Address (Street or Post Office Box)

City, State, and Zip Code

( ) ( )

Daytime Phone Evening Phone Taxpayer ID (Social Security)

<TABLE>
<S> <C> <C>
Legal form of ownership:
( ) Individual ( ) Tenants in Common ( ) Joint Tenants with Right of Survivorship
( ) Uniform Transfers to Minors ( ) Other
</TABLE>

August 4, 1998

Uwharrie Capital Corp
167 North Second Street
Albemarle, North Carolina 28001

RE: REGISTRATION STATEMENT ON FORM S-2

Gentlemen:

We have acted as counsel to Uwharrie Capital Corp (the "Company"), in connection
with the preparation of a Registration Statement on Form S-2 (the "Registration
Statement") to be filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), relating to
the registration of up to 850,000 shares (the "Shares") of the Company's common
stock, par value $1.25 per share ("Common Stock"). The Shares will be sold by
the Company pursuant to non-transferable subscription rights to existing
shareholders of the Company as of August 28, 1998 (the "Record Date") ("Existing
Shareholders") for the first 30 days of the Offering, or until 5:00 p.m. Eastern
Time on __________, 1998 (the "Shareholder Offering"). In the event that
Existing Shareholders subscribe for a number of shares in excess of the total
number of shares offered, subscriptions will be allocated on a pro rata basis
within the purchase limitations of this Offering. If shares remain unsubscribed
at the end of the Shareholder Offering, they will be offered at the same price
and with the same purchase limitations on a first-come-first-serve basis to the
following (the "Public Offering"): existing customers of the Bank of Stanly
and its subsidiaries, The Strategic Alliance Corporation and BOS Agency, Inc.,
on that same date; businesses in, residents of, or persons having property
interests in Stanly, Montgomery, Richmond, Anson, Union, Catawba, Rowan,
Randolph or Davidson County, North Carolina (the nine county area of North
Carolina known as the "Uwharrie Lakes Region"); and other persons or businesses
outside of the Uwharrie Lakes Region subject to the approval of the Company's
Board of Directors. This opinion is furnished pursuant to the requirement of
Item 601(b)(5) of Regulation S-K under the Act.

We have examined the Company's Articles of Incorporation, as amended to date,
and its Bylaws, as amended, minutes of meetings of its Board of Directors, and
such other corporate records of the Company and other documents and have made
such examinations as we have deemed necessary for the purposes of this opinion.
We have also relied upon a certificate of an officer of the Company, dated of
even date herewith, relating to the Registration Statement.
<PAGE>

Based on and subject to the foregoing and to the additional qualifications set
forth below, it is our opinion that the Shares that are being offered and sold
by the Company pursuant to the Registration Statement, when issued by the
Company as contemplated by the Registration Statement and sold in accordance
therewith, will be legally issued, fully paid and non-assessable.

We hereby consent to the reference to our firm in the Registration Statement
under the heading "legal matters" and to the filing of this opinion as an
exhibit to the Registration Statement. Such consent shall not be deemed to be an
admission that this firm is within a category of persons whose consent is
required under Section 7 of the Act or the regulations promulgated pursuant to
the Act.

This opinion is limited to the laws of the State of North Carolina and no
opinion is expressed as to the laws of any other jurisdiction.

The opinion expressed herein does not extend to compliance with federal and
state securities laws relating to the sale of the Shares.

This opinion is rendered solely for your benefit in connection with the
transaction described above and may not be used or relied upon by any other
person without prior written consent in each instance.

Very truly yours,

MOORE & VAN ALLEN, PLLC

Anthony Gaeta, Jr.

UWHARRIE CAPITAL CORP
DIRECTORS DEFERRED COMPENSATION PLAN

The Uwharrie Capital Corp Directors Deferred Compensation Plan
(hereinafter the "Plan") is intended to advance the interests of Uwharrie
Capital Corp, a North Carolina corporation (hereinafter the "Corporation"),
by providing its Board of Directors with additional incentive to promote
the success of the Corporation, and to encourage such directors to remain
as directors of the Corporation.

The Plan shall be administered by an individual, committee of individuals
or other person to be appointed by the Board of Directors of the Corporation
(hereinafter the "Administrator"). Subject to the provisions of the Plan and
the laws of the State of North Carolina, the Administrator shall have full
authority and sole discretion to administer, interpret and construe the Plan,
including setting rules and regulations relating to the Plan and making
determinations and taking action necessary for the implementation and
administration of the Plan, all in its discretion. All determinations
of the Administrator shall be final, conclusive and binding on the Corporation
and its stockholders and upon all participants in the Plan and anyone
claiming under or through any of them.

Section 1. DEFINITIONS. The following words and phrases shall have the
meanings set forth below whenever they are used in this Plan:

(a) ADMINISTRATOR. An individual, committee of individuals or
other person to be appointed by the Board of Directors of the Corporation;
the Administrator shall have full authority and sole discretion to
administer, interpret and construe the Plan, including setting rules and
regulations relating to the Plan and making determinations and taking
action necessary for the implementation and administration of the Plan,
all in its discretion.

(b) ALTERNATIVE RATE. The rate established separately for each
successive calendar quarter equal to the average yield-to-maturity
for the two (2) year United States Treasury note at the last auction in
the immediately preceding calendar quarter plus 2%.

(c) BENEFICIARY. The individual or individuals selected by a
director as beneficiary or alternate beneficiary pursuant to Section 2
hereunder who shall be entitled to receive payments upon the director's
death.

(d) CORPORATION. Uwharrie Capital Corp, a corporation chartered
under the laws of the State of North Carolina. Except where the context
clearly indicates otherwise, the word Corporation shall also refer to
all affiliated companies of the Corporation which have adopted the
provisions of the Plan.
<PAGE>

Except to the extent specifically provided otherwise, Uwharrie Capital
Corp shall have the authority to act on behalf of other adopting sub-
sidiaries with respect to the operation and administration or the Plan.

(e) DIRECTOR. A member of the Board of Directors of Uwharrie
Capital Corp and members of the Boards of Directors of affiliated companies
as selected by the Administrator to be eligible to defer directors'
fees under this Plan.

(f) ERISA. The Employee Retirement Income Security Act of 1974,
as amended.

(g) MOODY'S RATE. The rate to be established separately for each
successive calendar quarter that is equal to the average of the previous
calendar quarter's monthly Average Moody's Seasoned Aaa Corporate Bond
Yield Averages as published in Moody's Bond Record.

(h) PLAN. The Uwharrie Capital Corp Deferred Compensation Plan.

Section 2. DEFERRED COMPENSATION ELECTION. Each Director may elect to
defer receipt of all or any portion of the director's fees he expects to receive
for services rendered to the corporation as a Director during the term of his or
her service by entering into a written deferred compensation election in the
form and manner prescribed by the Administrator.

(a) ELECTION REVOCABILITY. The election to defer directors' fees
payable shall be irrevocable for the calendar year for which such election
is made. Any revocation will become effective in the calendar year after
such revocation is made and will continue in effect for succeeding calendar
years unless a new written deferred compensation election is executed.

(b) FORM OF DEFERRAL. In making an initial election to defer
directors' fees, the Director shall also give notice of his election as
to the manner and duration of distribution (which shall not exceed the
Director's actuarially computed life expectancy), and such election shall
be irrevocable for all calendar years with respect to which deferrals are
made pursuant too this Plan. Such election is limited to either a lump
sum payment or to distribution by means of approximately equal annual
installments with such installments to include principal and interest.
The initial election as to the manner and duration of distribution of all
amounts deferred by the Director and benefits provided under this Plan.

2
<PAGE>
(c) BENEFICIARY. Each Director making a deferral election under
this Plan may designate, in a writing delivered to the Administrator
prior to his or her death, a beneficiary to receive payments upon such
Director's death. A Director may also designate an alternate
beneficiary to receive payments if, and only if, the primary
beneficiary does not survive the death of such Director. A Director may
designate more than one person as a beneficiary or alternate
beneficiary, in which case such persons shall be entitled to receive
any payments hereunder as joint tenants with a right of survivorship. A
Director may change the designated beneficiary or alternate beneficiary
in a writing delivered to the Administrator prior to such Director's
death; unless otherwise specified in such writing, any change in
beneficiary or alternate beneficiary shall be deemed to be a revocation
of any prior designation under this Plan.

Section 3. INTEREST. Interest shall accrue on directors' fees
deferred by each Director hereunder at a rate to be established separately for
each successive calendar quarter by the Administrator. As of the effective date
of the Plan, the interest rate shall be determined based on the Moody's Rate.

In the event the above referenced index ceases to be published,
the Moody's Rate shall be replaced in the above referenced formula with the
Alternative Rate, or such other formula as shall be adopted by the
Administrator. Unless specifically agreed to hereafter by the Corporation, no
further adjustment shall be made following retirement, disability, death of a
Director, or termination of a Director's service with the Corporation whether
voluntary or involuntary.

Interest earned on a Director's account during a month shall be
the rate, as determined above, times the director's account balance on the first
day of that month times the actual number of days in that month divided by 360.
Interest earned during a month shall be credited to each Director's account on
the last day of the month in which the interest was earned. Account balances on
the first day of each month shall reflect contributions to or payments from the
accounts during the prior month, interest credited during the prior month, and
any other transactions in the Directors account. Each Directors account shall be
maintained as a bookkeeping record only, and all amounts credited to such
accounts shall remain as general assets of the Corporation.

Section 4. DISABILITY OF DIRECTOR. In the event a Director,
while in active service, becomes totally disabled, as such term is defined in
the Corporation's group life and health insurance plan, or such other welfare
benefit plan as determined by the Administrator, then the Corporation, at its
discretion, may make full or partial disbursement of the amount in the
Director's account. If disbursement commences and the Director thereafter
recovers from

3
<PAGE>

disability, then disbursement shall cease. The amount remaining in the
Director's account shall be held pursuant to the terms of this Plan and deferral
of compensation may resume.

Section 5. DEATH OF DIRECTOR. The Beneficiary of any payments to
be made after a Director's death shall be the beneficiary or alternate
beneficiary specified in accordance with Section 2 hereunder. If no Beneficiary
specified in such election shall survive the Director; any payment owed
hereunder shall be made to the Director's Estate. Should a Director die while
receiving installment payments pursuant to an election made pursuant to Section
2 of this Plan, the Beneficiary shall receive the remaining payments in
installments as previously elected by the Director. Should a Director die before
his service as a Director is completed, the amount deferred by such Director
under this Plan (including interest thereon and benefits accrued hereunder)
shall be paid to the Beneficiary as elected by the Director pursuant to Section
2; if such Director has elected to receive payment upon retirement, payment
shall be made or commence on the first day of the calendar quarter following the
later of the calendar quarter following such Director's death or quarter in
which such director would have reached age 55. If the Beneficiary should die
before all such payments are received, remaining payments shall be made to the
Beneficiary's estate, and not to any alternate beneficiary designated by the
Director.

Section 6. OBLIGATION OF THE CORPORATION UNSECURED. Each
Director, Beneficiary and any other person or persons having or claiming a right
to payments hereunder or to any interest in this Plan shall rely solely on the
unsecured promise of the Corporation set forth herein, and nothing in this Plan
shall be constructed to give a Director, Beneficiary or any other person or
persons any right, title, interest or claim in or to any specific asset, fund,
reserve account or property of any kind whatsoever owned by the Corporation or
in which the Corporation may have any right, title or interest now or in the
future, but each Director shall have the right to enforce his or her claim
against the Corporation in the same manner as any unsecured creditor.

Section 7. PLAN ADMINISTRATION.

(a) POWERS OF THE PLAN ADMINISTRATOR. The Administrator shall
have full power and authority to interpret, construe, and administer
this Plan. The Administrator's interpretations and constructions
hereof, and actions hereunder, including any determinations regarding
the amount or recipient of any payments shall be binding and conclusive
on all persons for all purposes. The Administrator shall not be liable
to any person for any action taken or omitted in connection with the
interpretation and administration of this Plan unless attributable to
his-willful misconduct or lack of good faith.

<PAGE>
(b) DENIAL OF A CLAIM FOR BENEFITS. The following claims procedure
shall apply to the Plan and shall be interpreted consistent with the
requirements of ERISA:

(i) If for any reason a claim for benefits under this Plan is
denied, the Administrator shall deliver to the claimant a written explana-
tion setting forth the specific reasons for the denial, pertinent
references to the Plan section on which the denial is based, such other
data as may be pertinent and information on the procedures to be followed
by the claimant in obtaining a review of its claim, all written in a
manner calculated to be understood by the claimant. For this purpose:

(1) The claimant's claim shall be deemed filed when presented
orally or in writing to the Administrator.

(2) The Administrator's explanation shall be in writing
delivered to the claimant within 90 days of the date the claim
is filed.

(ii) The claimant shall have 60 days following its receipt of the
denial of the claim to file with the Administrator a written request
for review of the denial. For such review, the claimant or its represen-
tative may submit pertinent documents and written issues and comments.

(iii) The Administrator shall decide the issues on review and
furnish the claimant with a copy within 60 days of receipt of the
claimant's request for review of its claim. The decision on review shall
be in writing and shall include specific reasons for the decisions
written in a manner calculated to be understood by the claimant, as well
as specific references to the pertinent Plan provisions on which the
decision is based. If a copy of the decision is not so furnished to the
claimant within such 60 days, the claim shall be deemed denied on review.

(c) PAYMENTS ON BEHALF OF AN INCOMPETENT. If the Administrator
finds that any person who is entitled to any payment hereunder is a
minor or is unable to care for his or her affairs because of disability
or incompetency, payment of any such amounts may be made to anyone
found by the Administrator to have incurred expense on behalf of such
person, or to be otherwise entitled to such payment, in the manner and
under the conditions that the Administrator determines. Such payment
shall be a complete discharge of the liabilities of the Corporation
hereunder with respect to the amounts so paid.

5
<PAGE>

(d) THE CORPORATION'S BOOKS AND RECORDS ARE CONTROLLING. The books
and records of the Corporation and the Administrator shall be controlling
in the event a question arises hereunder concerning the amount of direc-
tors' fees, deferred amounts, or interest earned with respect to any
deferred amounts; the account balances; elections as to payment date
or the number of installments; the designation of a beneficiary, or any
similar matter.

Section 8. AMENDMENTS. This Plan may be amended by the Corporation
at any time or from time to time, provided, however, the Plan may not be amended
to accelerate the payment of any amount to a Director or Beneficiary unless
the Corporation finds that such acceleration is necessary due to unusual cond-
itions or hardship of such Director or Beneficiary, and further provided no
amendment shall reduce a Director's or Beneficiary's benefits under the Plan
to an amount less than the amount he would have been entitled to under the Plan
on the later of the date the amendment is adopted or made effective, as if the
Plan had been terminated on that date.

Section 9. TERMINATION. Although the Plan is intended to be permanent
notwithstanding any provision, herein, Uwharrie Capital Corp may
terminate this Plan, and a subsidiary may terminate its participation
herein, at any time. Uwharrie Capital Corp may terminate the Plan, if, in
its sole discretion, it determines that any change in federal or state law,
or judicial or administra- tive interpretation thereof, has materially
affected the Corporation's cost of providing the benefits otherwise payable
to a Director shall be calculated as if the Director terminated employment
on the date the Plan terminated, and shall be paid in a lump sum as soon as
administratively possible after the termination of the Plan.

Section 10. ASSIGNMENTS PROHIBITED. No Director, Beneficiary, or
other person entitled to payments hereunder shall have power to transfer,
assign, anticipate, mortgage or otherwise encumber their interest in advance
any of such payments. Except as provided in Section 3, such payments shall
not be subject to seizure for the payments of public or private debts,
judgments, alimony or separate maintenance, or be transferable by operation of
law in event of bankruptcy, insolvency or otherwise, or be subject to any
liability of a Director, Beneficiary or other entitled to payments hereunder.

Section 11. BINDING EFFECTS. This Plan shall be binding upon the
Directors, their heirs, executors, administrators, successors and assigns.
Upon the merger, consolidation, or reorganization of the Corporation, (a) this
Plan may be assumed by the successor corporation, subject to the prior approval
of Uwharrie Capital Corp and the successor shall have all the rights,

6
<PAGE>

duties and obligations of the Corporation hereunder; or (b) to the extent
provided by Uwharrie Capital Corp, prior to the event described above, the Plan
shall become binding on the successor, or (c) prior to the event described above
Uwharrie Capital Corp may provide that the Plan be terminated and benefits
hereunder shall be immediately payable.

Section 12. SEVERABILITY. In the event any provision of this
Plan shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.

Section 13. WITHHOLDING. The Corporation may withhold or require
the withholding of, from any payment which it is required to make under this
Plan, any Federal, State or local taxes required by law to be withheld with
respect to such payment and such sum as the Corporation may reasonably estimate
as necessary to cover any taxes for which the Corporation may be liable and
which may be assessed with regard to such payment.

Section 14. GOVERNING LAW. This Plan shall be governed,
construed and enforced in accordance with the laws of the State of North
Carolina, except to the extent exempted by ERISA.

Section 15. TAX LITIGATION. The corporation shall have the right
to contest, at its expense, any tax ruling or decision, administrative or
judicial, on an issue that is related to the Plan and that the Administrator
believe to be important to participants in the Plan, and to conduct any such
contest or any litigation arising therefrom to a final decision.

Section 16. MISCELLANEOUS. The Plan is intended to qualify for
the "top-hat" exemption within the meaning of ERISA, and shall be construed
accordingly

IN WITNESS WHEREOF, the officers of the Corporation have executed this
Plan this the 28 day of December 1994.

ATTEST: UWHARRIE CAPITAL CORP.

/s/ Tamara M. Singletary BY: /s/ Roger L. Dick
- ------------------------- ------------------
Secretary Authorized Officer

(DIXON ODOM PLLC logo)
Certified Public Accountants

CONSENT OF INDEPENDENT AUDITORS

To the Board of Directors
Uwharrie Capital Corp.
Albemarle, North Carolina

We consent to the use in the Registration Statement of Uwharrie Capital Corp on
Form S-2 of our report dated July 24, 1998 on the consolidated financial
statements of Uwharrie Capital Corp as of December 31, 1997 and 1996, and for
each of the years in the three year period ended December 31, 1997, and to the
reference to our firm under the heading "Experts" in the Registration Statement.

DIXON ODOM PLLC

Southern Pines, North Carolina
August 7, 1998

A member of
MOORES
ROWLAND 6 Turnberry Wood
INTERNATIONAL P.O. Box 1655
An association of independent Southern Pines, N.C. 28388-1655
accounting firms throughout the world. 910-692-8555, Fax 910-692-4906

<ARTICLE> 9

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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1998
<CASH> 4,506
<INT-BEARING-DEPOSITS> 111,866
<FED-FUNDS-SOLD> 925
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<ALLOWANCE> 1,162
<TOTAL-ASSETS> 154,001
<DEPOSITS> 127,975
<SHORT-TERM> 5,117
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<COMMON> 2,868
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<INCOME-PRETAX> 954
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<NET-INCOME> 657
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</TABLE>

PROMISSORY NOTE

$__________.00
Albemarle, North Carolina
________________, 1998

FOR VALUE RECEIVED the undersigned promises to pay to UWHARRIE CAPITAL
CORP ("Holder"), the principal sum of_________________ DOLLARS and_____ /100
CENTS ($_________ ), amortized over TWENTY-FOUR (24) months ("Term"), without
interest on the unpaid balance, commencing on______ , 1998, and continuing on
the first day of each successive month thereafter until paid in full, or until
default, in lawful money of the United States of America at the office of the
Holder (Uwharrie Capital Corp, 167 North Second Street, Post Office Box 338,
Albemarle, North Carolina 28002-0338, ATTN: Tamara Singletary, Executive Vice
President) or at such other place as the Holder hereof may designate in writing.

This Note is executed pursuant to the Installment Purchase Plan (the
"Purchase Plan") of the Holder outlined in its Prospectus dated ___________,
1998 (the "Prospectus"), regarding its offering of up to 850,000 shares of its
common stock (the "Offering"). The Purchase Plan provides that accountholders in
the Bank of Stanly, a subsidiary of the Holder, purchasing 500 shares or less in
the Offering, and meeting certain credit standards of the Holder, may purchase
their shares pursuant to the Purchase Plan.

The calculated monthly payments shall be due and payable as reflected
on the attached AMORTIZATION SCHEDULE. Monthly payments will begin on____ ,
1998, with the first payment being due upon execution of this Note, and the
remaining payments due on the first day of each month thereafter until paid in
full. The amount of each calculated monthly payment will not fluctuate unless
and until additional amounts are added to the outstanding indebtedness, in which
case a revised AMORTIZATION SCHEDULE will be prepared and payments thereafter
shall be made according to the revised AMORTIZATION SCHEDULE.

The___ shares to be purchased pursuant to this Note will be held in
escrow pursuant to Section 55-6-21 of the North Carolina General Statutes until
the satisfaction of this Note, or, as explained below, until the event of a
default and failure to cure.

If not sooner paid, the entire remaining indebtedness shall be due and
payable on_________, 2000.

Unless otherwise provided, this Note may be prepaid in full or in part
at any time without penalty or premium. Partial prepayments shall be applied to
installments due in reverse order of their maturity.

In the event of default in payment of any installment as the same
becomes due and such default is not cured within thirty (30) days from the due
date, Holder may without further notice,

<PAGE>

declare the remainder of the principal sum at once due and payable. Failure to
exercise this option shall not constitute a waiver of the right to exercise the
same at any other time.

All parties to this Note, including maker and any sureties, endorsers,
or guarantors hereby waive protest, presentment, notice of dishonor, and notice
of acceleration of maturity and agree to continue to remain bound for all sums
due under this Note notwithstanding any change or changes by way of release,
surrender, exchange, modification or substitution of any security for this Note
or by way of any extension or extensions of time for any payments due hereunder;
and all such parties waive all and every kind of notice of such change or
changes and agree that the same may be made without notice or consent of any of
them.

Upon default, the Holder of this Note may employ an attorney to enforce
Holder's rights and remedies and the maker, principal, surety, guarantor and
endorsers of this Note hereby agree to pay to the holder reasonable attorneys'
fees not exceeding a sum equal to fifteen percent (15%) of the outstanding
balance owing on this Note, plus all other reasonable expenses incurred by the
holder in exercising any of Holder's rights and remedies upon default. The
rights and remedies of Holder as provided in this Note and any instrument
securing this Note shall be cumulative and may be pursued singly, successively,
or together against any security held by Holder for payment or security, in the
sole discretion of Holder. The failure to exercise any such right or remedy
shall not be a waiver or release of such rights or remedies or the right to
exercise any of them at another time.

Upon default and failure to cure, the undersigned will be charged an
"administrative cost fee" of 10% of the principal sum stated above. Moreover, in
such event, the amount of shares for which payment has been received, or at the
option of the undersigned, the payments made, minus the administrative cost fee
incurred, shall be refunded to the undersigned.

This Note is given as evidence of indebtedness and is to be governed
and construed in accordance with the laws of the State of North Carolina.

Witness my hand and seal the day and year first written above.

__________________________________ (SEAL)

By: _______________________________

Address: ___________________________

___________________________

-2-