8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of Report (date of earliest event reported): October 20, 2003

Peoples Bancorp of North Carolina, Inc.

(Exact Name of Registrant as Specified in Its Charter)

North Carolina	000-27205	56-2132396
(State or Other Jurisdiction	(Commission File No.)	(IRS Employer
of Incorporation)		Identification No.)

518 West C Street
Newton, North Carolina	28658
(Address of Principal Executive Offices)	(Zip Code)

(828) 464-5620

Registrant's Telephone Number, Including Area Code)

Peoples Bancorp of North Carolina, Inc.

INDEX

	Page
Item 7 – Financial Statements and Exhibits	3
Item 12 – Results of Operations and Financial Condition	3
Signatures	4
Exhibit (99)(a) Press Release dated October 20, 2003	5

2

Item 7. Financial Statements and Exhibits

(c)        Exhibits

(99)(a) Press Release, dated October 20, 2003

Item 12. Results of Operations and Financial Condition

On October 20, 2003, Peoples Bancorp of North Carolina, Inc. issued a press release announcing third quarter earnings.

A copy of the press release is attached hereto as Exhibit (99)(a) and is incorporated by reference herein.

Disclosure about forward-looking statements

This Form 8-K contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, changes in interest rate environment, management’s business strategy, national, regional, and local market conditions and legislative and regulatory conditions.

Readers should not place undue reliance on forward-looking statements, which reflect management’s view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.

3

SIGNATURES

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

	PEOPLES BANCORP OF NORTH CAROLINA, INC.
Date:   October 23, 2003	By:	/s/ A. Joseph Lampron
		A. Joseph Lampron
		Executive Vice President and Chief Financial Officer

4

EX-99.(A)

Exhibit (99)(a)

NEWS RELEASE

October 20, 2003

Contact:	Tony W. Wolfe
	President and Chief Executive Officer
	A. Joseph Lampron
	Executive Vice President and Chief Financial Officer
	828-464-5620, Fax 828-465-6780

For Immediate Release

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS

Peoples Bancorp of North Carolina, Inc., the parent company of Peoples Bank, reported net income of $318,604, or $0.10 basic and diluted net income per share, for the three months ended September 30, 2003 as compared to $1,293,725, or $0.41 basic and diluted net income per share, for the same period one year ago. Net earnings from recurring operations for the three months ended September 30, 2003 were $357,969, or $0.11 basic and diluted net earnings per share, representing a 60% decrease from third quarter 2002 net income from recurring operations of $884,739, or $0.28 basic and diluted net earnings per share.

Tony W. Wolfe, President and Chief Executive Officer, attributed the decrease in third quarter recurring earnings to a decrease in net interest income, increased non-interest expense and higher than normal income tax rate. Mr. Wolfe also pointed out that the lack of economic growth in the Bank’s local market continues to have a negative impact on the performance of customers of the Bank. This is reflected in the provision for loan losses of $1,560,000 in the third quarter of 2003, which continues to be at historically high levels.

Net interest income after the provision for loan losses decreased 7% to $3,856,429 for the three months ended September 30, 2003 when compared to $4,127,620 for the same period one year ago. This decrease is attributable to a reduction in the Bank’s prime commercial lending rate in June 2003 combined with a decrease in the yield on investment securities. Non-interest expense increased 15% to $4,820,967 for the three months ended September 30, 2003, as compared to $4,194,141 for the same period last year. The increases in non-interest expense included an increase of $63,163 or 8% in occupancy expense, primarily due to expenses associated with the new branch offices opened in late 2002 and an increase of $479,346 or 53% in non-interest expenses other than salaries, benefits and occupancy ex penses. The increase in such other non-interest expenses included an increase of $200,796 in consulting and advertising expense due to an aggressive retail marketing campaign started by the Bank in July, 2003 and designed to grow core deposits, an increase of $68,304 in foreclosure and collection expense due to increased volume of other real estate owned and repossessed assets and an increase of $179,149 in other taxes primarily due to state franchise tax. As a result of a review of the Bank’s tax position and adjustments made to state income taxes, the effective tax rate was 49% for the quarter ended September 30, 2003 compared to 35% for the same quarter in 2002.

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS- PAGE TWO

Year-to-date net income as of September 30, 2003 was $1,827,892, or $0.58 basic and diluted net income per share as compared to $2,825,900, or $0.89 basic and diluted net income per share, for the same period one year ago. Net income from recurring operations for the nine months ended September 30, 2003 was $1,923,284, or $0.61 basic and diluted net income per share, representing a 20% decrease from net income from recurring operations of $2,407,229, or $0.76 basic and diluted net income per share for the nine months ended September 30, 2002. Net non-recurring losses on the disposition of assets in 2003 amounted to $95,399, net of income tax expense. Net losses on disposition of assets included a $628,312 net loss on repossessed assets, which was partially offset by a $478,759 gain associated with the sale of the Bank’s $3.7 million credit card portfolio during the first quarter. In the nine months ended September 30, 2002 the Company had non-recurring gains on the sale of securities of $625,616, combined with non-recurring gains on the disposition of assets of $4,502.

The decrease in year-to-date recurring earnings is primarily attributable to an increase in the provision for loan losses and an increase in non-interest expense. The year-to-date provision for loan losses increased to $4,629,900 as of September 30, 2003, as compared to $3,343,600 for the nine months ended September 30, 2002. The increase in the provision for loan losses reflects an increase in classified loans and non-performing assets, which is the result of adverse business conditions in the Bank’s market area. Non-interest expense for the nine months ended September 30, 2003, was $13,442,891 as compared to $12,602,143 for the same period last year. The increase in year-to-date non-interest expense included an increase of $200,256 or 9% in occupancy expense, primarily due to expenses a ssociated with the new branch offices opened in late 2002 and an increase of $480,538 or 16% in non-interest expenses other than salary, benefits and occupancy expenses. The increase in such other non-interest expenses included an increase in consulting and advertising expense of $203,495 due to the marketing campaign started by the Bank in July, 2003 and an increase of $275,426 in other taxes primarily due to the state franchise tax.

Year-to-date net interest income increased 7% to $16,307,570 for the nine months ended September 30, 2003 compared to $15,199,076 for the same period one year ago. This increase is primarily attributable to a decrease in interest expense resulting from a reduction in the cost of funds, which was partially offset by a decrease in interest income resulting from a reduction in the Bank’s prime commercial lending rate in June 2003 coupled with a decrease in the yield on investments.
 

Net earnings for the year ending December 31, 2003, including non-recurring items, are expected to be in the range of $2.6 million to $3.0 million, resulting in basic and diluted earnings per share in the range of $0.83 to $0.96, approximately 45% to 36% below previous expectations. 

Total assets as of September 30, 2003 amounted to $668,543,936, an increase of 6% compared to total assets of $633,194,415 at September 30, 2002. This increase is primarily attributable to an increase in loans.

Loans increased 6% to $541,334,155 as of September 30, 2003 compared to $510,882,521 as of September 30, 2002. Non-performing assets totaled $9,529,483 at September 30, 2003 or 1.43% of total assets, compared to $9,072,743 at September 30, 2002 or 1.43% of total assets. Non-performing assets decreased $2,127,546 from June 30, 2003. This is primarily due to the settlement of loans to one customer totaling $2.5 million that resulted in a

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS- PAGE THREE

charge-off of $1.4 million. Non-accrual loans at September 30, 2003 include $2.2 million in loans with a customer that is a former director. An additional $460,000 was included in the provision for loan losses in the quarter ended September 30, 2003 for the loans to that customer. The allowance for loan losses at September 30, 2003 amounted to $8,887,322 or 1.64% of total loans compared to $7,513,045 or 1.47% of total loans at September 30, 2002.

Deposits amounted to $545,540,631 as of September 30, 2003, representing an increase of 8% over deposits of $507,411,315 at September 30, 2002.

Shareholders’ equity increased to $48,706,895, or 7.29% of total assets, at September 30, 2003 as compared to $48,182,157, or 7.61% of total assets, at September 30, 2002.

Peoples Bank operates eleven offices throughout Catawba County, North Carolina, one office in Alexander County, North Carolina and three offices in Lincoln County, North Carolina. The Company’s common stock is publicly traded over the counter and is quoted on the Nasdaq National Market under the symbol "PEBK." Scott and Stringfellow, Inc., Ryan, Beck & Co., Sterne Agee & Leach, Inc. and Trident Securities, Inc. are market makers for the Company’s shares.

(TABLES FOLLOW)

Statements made in this press release, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this release was prepared. These statements can be identified by the use of words like "expect," "anticipate," "estimate," and "believe," variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results t o differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the markets served by Peoples Bank, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company’s other filings with the Securities and Exchange Commission, including but not limited to those described in Peoples Bancorp of North Carolina, Inc.’s annual report on Form 10-K for the year ended December 31 , 2002, under "General Description of Business."

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FOUR
CONSOLIDATED BALANCE SHEETS
September 30, 2003, December 31, 2002 and September 30, 2002
		September 30, 2003			December 31, 2002			September 30, 2002
		(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	19,510,852		$	13,803,665		$	14,822,792
Federal funds sold		6,531,000			1,774,000			3,045,000
Cash and cash equivalents		26,041,852			15,577,665			17,867,792
Investment securities available for sale		76,402,762			71,735,705			75,258,103
Other investments		4,091,973			4,345,573			4,902,773
Total securities		80,494,735			76,081,278			80,160,876
Loans		541,334,155			526,369,746			510,882,521
Mortgage loans held for sale		4,811,700			5,064,635			5,342,705
Less: Allowance for loan losses		(8,887,322	)		(7,247,906	)		(7,513,045	)
Net loans		537,258,533			524,186,475			508,712,181
Premises and equipment, net		12,831,686			15,620,977			15,148,833
Accrued interest receivable and other assets		11,917,130			13,275,143			11,304,733
Total assets	$	668,543,936		$	644,741,538		$	633,194,415
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	78,126,007		$	67,398,458		$	66,453,485
NOW, MMDA & Savings		155,290,700			156,554,189			157,503,640
Time, $100,000 or more		171,985,514			160,836,596			158,360,558
Other time		140,138,410			130,949,712			125,093,632
Total deposits		545,540,631			515,738,955			507,411,315
Demand notes payable to U.S. Treasury		413,043			1,600,000			1,600,000
FHLB borrowings		58,000,000			63,071,429			59,821,429
Trust preferred securities		14,000,000			14,000,000			14,000,000
Accrued interest payable and other liabilities		1,883,367			1,726,421			2,179,514
Total liabilities		619,837,041			596,136,805			585,012,258
Shareholders' Equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued
and outstanding		-			-			-
Common stock, no par value; authorized
20,000,000 shares; issued and
outstanding 3,133,547 shares in
2003 and 2002		35,097,773			35,097,773			35,097,773
Retained earnings		12,982,190			12,094,363			11,797,862
Accumulated other comprehensive income		626,932			1,412,597			1,286,522
Total shareholders' equity		48,706,895			48,604,733			48,182,157
Total liabilities and shareholders' equity	$	668,543,936		$	644,741,538		$	633,194,415
Memorandum: Letters of Credit	$	3,010,326		$	2,061,103		$	2,163,741

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FIVE
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2003 and 2002
		Three months ended				Nine months ended
		September 30,				September 30,
		2003		2002		2003		2002
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	7,865,767	$	8,204,934	$	23,473,128	$	23,959,509
Interest on federal funds sold		10,123		2,661		54,220		26,509
Interest on investment securities:
U.S. Government agencies		474,404		870,809		1,658,519		2,744,381
States and political subdivisions		141,631		140,161		432,982		469,795
Other		117,756		125,287		335,553		372,284
Total interest income		8,609,681		9,343,852		25,954,402		27,572,478
INTEREST EXPENSE:
NOW, MMDA & Savings deposits		330,861		549,096		965,858		1,598,442
Time deposits		2,056,708		2,237,246		6,237,185		8,206,010
FHLB borrowings		646,070		663,681		1,947,993		2,000,613
Trust preferred securities		157,500		183,750		490,000		551,250
Other		2,113		4,959		5,796		17,087
Total interest expense		3,193,252		3,638,732		9,646,832		12,373,402
NET INTEREST INCOME		5,416,429		5,705,120		16,307,570		15,199,076
PROVISION FOR LOAN LOSSES		1,560,000		1,577,500		4,629,900		3,343,600
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		3,856,429		4,127,620		11,677,670		11,855,476
OTHER INCOME:
Service charges		825,408		799,230		2,416,487		2,208,713
Other service charges and fees		133,881		97,798		438,761		374,856
Gain (loss) on sale of securities		-		625,616		-		625,616
Mortgage banking income		206,071		138,148		610,179		538,014
Insurance and brokerage commission		106,411		131,287		305,603		376,552
Miscellaneous		318,771		277,967		859,883		876,016
Total other income		1,590,542		2,070,046		4,630,913		4,999,767
OTHER EXPENSES:
Salaries and employee benefits		2,543,962		2,459,645		7,473,472		7,313,518
Occupancy		890,391		827,228		2,540,557		2,340,301
Other		1,386,614		907,268		3,428,862		2,948,324
Total other expenses		4,820,967		4,194,141		13,442,891		12,602,143
INCOME BEFORE INCOME TAXES		626,004		2,003,525		2,865,692		4,253,100
INCOME TAXES		307,400		709,800		1,037,800		1,427,200
NET INCOME	$	318,604	$	1,293,725	$	1,827,892	$	2,825,900
PER SHARE AMOUNTS
Basic net income	$	0.10	$	0.41	$	0.58	$	0.89
Diluted net income	$	0.10	$	0.41	$	0.58	$	0.89
Cash dividends	$	0.10	$	0.10	$	0.30	$	0.30
Book value	$	15.54	$	15.38	$	15.54	$	15.38

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE SIX
FINANCIAL HIGHLIGHTS
For the three and nine months ended September 30, 2003 and 2002
		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for Sale Securities	$	73,763,546		$	75,596,351		$	70,438,974		$	79,317,147
Loans		540,896,649			509,793,897			537,261,341			503,869,806
Earning Assets		633,746,039			590,469,239			623,146,482			590,019,357
Assets		667,608,720			621,901,676			658,686,746			621,147,028
Deposits		543,112,559			496,653,385			530,913,052			495,244,855
Shareholders' Equity		49,701,527			47,642,340			50,159,228			47,540,203
SELECTED KEY DATA:
Net Interest Margin (tax equivalent)		3.44	%		3.88	%		3.55	%		3.50	%
Return on Average Assets		0.19	%		0.83	%		0.37	%		0.61	%
Return on Average Shareholders' Equity		2.54	%		10.77	%		4.87	%		7.95	%
Shareholders' Equity to Total Assets (Period End)		7.29	%		7.61	%		7.29	%		7.61	%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	9,033,342		$	7,117,151		$	7,247,905		$	6,090,570
Provision for loan losses		1,560,000			1,577,500			4,629,900			3,343,600
Charge-offs		(1,764,890	)		(1,208,485	)		(3,143,812	)		(2,026,485	)
Recoveries		58,870			26,879			153,329			105,360
Balance, end of period	$	8,887,322		$	7,513,045		$	8,887,322		$	7,513,045
ASSET QUALITY:
Nonaccrual Loans							$	7,562,611		$	8,434,846
90 Days Past Due and still accruing								126,472			614,897
Other Real Estate Owned								1,556,697			20,000
Repossessed Assets								283,703			3,000
Total Nonperforming Assets							$	9,529,483		$	9,072,743
Nonperforming Assets to Total Assets								1.43	%		1.43	%
Allowance for Loan Losses to Nonperforming Assets								93.26	%		82.81	%
Allowance for Loan Losses to Total Loans								1.64	%		1.47	%

LOAN RISK GRADE ANALYSIS:	Percentage of Loans				General Reserve
	By Risk Grade				Percentage
	9/30/2003		9/30/2002		9/30/2003		9/30/2002
Risk 1 (Excellent Quality)	10.60	%	8.84	%	0.15	%	0.15	%
Risk 2 (High Quality)	27.84	%	36.61	%	0.50	%	0.50	%
Risk 3 (Good Quality)	51.34	%	43.84	%	1.00	%	1.00	%
Risk 4 (Management Attention)	3.84	%	5.45	%	2.50	%	2.50	%
Risk 5 (Watch)	2.36	%	2.16	%	7.00	%	7.00	%
Risk 6 (Substandard)	2.47	%	1.45	%	12.00	%	12.00	%
Risk 7 (Low Substandard)	0.16	%	0.00	%	25.00	%	25.00	%
Risk 8 (Doubtful)	0.00	%	0.00	%	50.00	%	50.00	%
Risk 9 (Loss)	0.00	%	0.00	%	100.00	%	100.00	%

At September 30, 2003 there were three relationships exceeding $1 million each (which totaled $8.2 million) in the Watch risk grade and three relationships exceeding $1 million each (which totaled $9.5 million) in the Substandard risk grade. Balances of individual relationships exceeding $1 million in these risk grades ranged from $1.5 million to $3.9 million. These customers continue to meet payment requirements and would not become non-performing assets unless they are unable to meet those requirements.

(END)