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 15, 2007
Peoples Bancorp of North Carolina, Inc.
(Exact Name of Registrant as Specified in Its Charter)
North Carolina
(State or Other Jurisdiction of Incorporation)
000-27205		56-2132396
(Commission File No.)		(IRS Employer 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)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Peoples Bancorp of North Carolina, Inc.

INDEX

	Page
Item 2.02 - Results of Operations and Financial Condition	3
Item 9.01 - Financial Statements and Exhibits	3
Signatures	4
Exhibit (99)(a) Press release dated October 15, 2007	5

2

Item 2.02. Results of Operations and Financial Condition

On October 15, 2007, Peoples Bancorp of North Carolina, Inc. issued a press release announcing third quarter 2007 earnings.

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

Item 9.01. Financial Statements and Exhibits

(d)	Exhibits
(99)(a)	Press release, dated October 15, 2007

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 18, 2007	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 15, 2007
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. (NASDAQ: PEBK), the parent company of Peoples Bank, reported net income of $2.6 million, or $0.46 basic net income per share and $0.45 diluted net income per share, for the three months ended September 30, 2007 as compared to $2.4 million or $0.42 basic net income per share and $0.41 diluted net income per share, for the same period one year ago.  September 30, 2006 per share amounts have been restated to reflect the 3-for-2 stock split declared and distributed during the second quarter 2007.  Tony W. Wolfe, President and Chief Executive Officer, attributed the increase in third quarter earnings to an increase in net interest income and a decrease in provision for loan losses, which were partially offset by an increase in non-interest expense.

Year-to-date net income as of September 30, 2007 was $8.0 million, or $1.40 basic net income per share and $1.37 diluted net income per share as compared to $7.3 million, or $1.28 basic net income per share and $1.26 diluted net income per share, for the same period one year ago.  The increase in year-to-date earnings is primarily attributable to growth in interest-earning assets, which contributed to increases in net interest income and non-interest income.  In addition, the Company had a decrease in the provision for loan losses for the nine months ended September 30, 2007 as compared to the same period one year ago. The increases in net interest income and non-interest income and the decrease in the provision for loan losses were partially offset by an increase in non-interest expense as discussed below.

Shareholders’ equity increased to $68.3 million, or 7.88% of total assets, at September 30, 2007 as compared to $60.9 million, or 7.66% of total assets, at September 30, 2006 as a result of net income earned less dividends paid for the period combined with a $1.5 million increase in accumulated other comprehensive income (loss) from September 30, 2006 to September 30, 2007.  The increase in accumulated other comprehensive income (loss) is primarily due to an increase in the market value of available for sale securities.

Net interest income for the quarter ended September 30, 2007 increased 5% to $8.6 million compared to $8.1 million for the same period one year ago.  This increase is attributable to an increase in the average outstanding balances of loans and investment securities available for sale for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.  Net interest income after the provision for loan losses increased 11% to $8.3 million during the third quarter of 2007, compared to $7.5 million for the same period one year ago.  The provision for loan losses for the three months ended September 30, 2007 was $296,000 as compared to $686,000 for the same period one year ago, primarily attributable to a decrease in net charge-offs of $352,000.

Non-interest income was $2.0 million for the three months ended September 30, 2007 and the three months ended September 30, 2006.  Increases in components of non-interest income for the three months ended  September 30, 2007 compared to the same period last year include a $200,000 increase in service charges and fees resulting from activity in new branches, an increase of $97,000 in brokerage commission due to an increase in income from the Bank’s investment subsidiary and an increase in mortgage banking income of $20,000 due to an increase in brokered loan activity.  These increases were offset by a $149,000

5

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS – PAGE TWO

decrease in miscellaneous fee income primarily due to a $118,000 decrease in income received from SBIC investments, which is included in miscellaneous non-interest income and a $203,000 increase in losses on the sale of securities.  The $367,000 in the loss on the sale of securities for the three months ended September 30, 2007 includes a $236,000 write-down of an asset classified as investment securities available for sale.  Management determined the market value of this investment had decreased significantly and was not a temporary impairment therefore a write-down was appropriate during third quarter 2007. 

Non-interest expense increased 7% to $6.2 million for the three months ended September 30, 2007, as compared to $5.8 million for the same period last year.  The increase in non-interest expense included: (1) an increase of $234,000 or 8% in salaries and benefits expense due to normal salary increases and expense associated with additional staff for new branches, (2) an increase of $154,000 or 15% in occupancy expense due primarily to an increase in furniture and equipment expense and lease expense associated with new branches, and (3) a net increase of $39,000 or 2% in non-interest expenses other than salary, benefits and occupancy expenses.  The increase in non-interest expenses other than salary, benefits and occupancy expenses is primarily attributable to an increase of $56,000 in advertising expense, an increase of $50,000 in professional fees and an increase of $26,000 in debit card expense.  These increases in non-interest expenses other than salary, benefits and occupancy expenses were partially offset by a $152,000 decrease in amortization of trust preferred securities issuance costs.

Year-to-date net interest income as of September 30, 2007 increased 8% to $25.9 million compared to $23.9 million for the same period one year ago.  This increase is attributable to an increase in interest income due to increases in the prime rate, which resulted from Federal Reserve interest rate increases.  In addition, the average outstanding balances of loans and investment securities available for sale increased for the nine months ended September 30, 2007.  Net interest income after the provision for loan losses increased 12% to $24.6 million for the nine months ended September 30, 2007, compared to $22.0 million for the same period one year ago.  The provision for loan losses for the nine months ended September 30, 2007 was $1.3 million as compared to $1.9 million for the same period one year ago, primarily attributable to slower growth in loan balances for the first nine months of 2007 when compared to the same period in 2006 and a reduction in net charge-offs of $281,000.

Non-interest income increased 5% to $6.3 million for the nine months ended September 30, 2007, as compared to $6.0 million for the same period one year ago.  The increase in non-interest income is primarily due to an increase in service charges and fees of $370,000 resulting from activity in new branches, an increase of $114,000 in insurance and brokerage commission primarily due to an increase in income from the Bank’s investment subsidiary and an increase in mortgage banking income of $80,000 primarily due to an increase in brokered loan activity.  These increases were partially offset by a $224,000 increase in losses on the sale of securities.

Non-interest expense increased 11% to $18.4 million for the nine months ended September 30, 2007, as compared to $16.6 million for the same period last year. The increase in non-interest expense included: (1) an increase of $1.2 million or 14% in salaries and benefits expense due to normal salary increases and expenses associated with additional staff for the new branches, (2) an increase of $463,000 or 15% in occupancy expense due to an increase in furniture and equipment expense and lease expense associated with the new branches, and (3) a net increase of $117,000 or 2% in non-interest expenses other than salary, benefits and occupancy expenses.  The increase in non-interest expenses other than salary, benefits and occupancy expenses is primarily attributable to an increase of $175,000 in professional fees, an increase of $145,000 in advertising expense, an increase of $85,000 in debit card expense and an increase of $55,000 in office supplies expense.  These increases in non-interest expenses other than salary, benefits and occupancy expenses were partially offset by a $309,000 decrease in amortization of trust preferred securities issuance costs.  The Company paid a $178,000 prepayment fee in the first quarter of 2006 on the early termination of a $5.0 million Federal Home Loan Bank advance.  This fee was included in other non-interest expense.

6

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS – PAGE THREE

Total assets as of September 30, 2007 amounted to $867.4 million, an increase of 9% compared to total assets of $795.0 million at September 30, 2006.  This increase is primarily attributable to an increase in loans.  Loans increased 10% to $689.4 million as of September 30, 2007 compared to $624.3 million as of September 30, 2006.

  Non-performing assets totaled $7.3 million at September 30, 2007 or 0.84% of total assets, compared to $3.8 million at September 30, 2006 or 0.48% of total assets.  This increase in non-performing assets is due to one large classified loan relationship that was moved to non-accrual status in fourth quarter 2006.  This relationship totals $3.7 million at September 30, 2007 and has been appropriately reserved in the Bank’s allowance for loan losses.  The allowance for loan losses at September 30, 2007 amounted to $8.7 million or 1.26% of total loans compared to $8.1 million or 1.30% of total loans at September 30, 2006.

Deposits amounted to $675.4 million as of September 30, 2007, representing an increase of 11% over deposits of $606.5 million at September 30, 2006.  Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and certificates of deposits of denominations less than $100,000, increased $55.6 million to $486.5 million at September 30, 2007 as compared to $430.9 million at September 30, 2006 due to concerted efforts to attract additional deposits from existing customers and to attract new customers in our existing offices along with deposits gathered in the two new offices opened since June 2006.  The Bank has also introduced remote deposit capture for customers in 2007, which has enabled the Bank to gather additional deposits from several existing customers and has been helpful in attracting new customers at the new office in Cornelius.  Certificates of deposit in amounts greater than $100,000 or more totaled $189.0 million at September 30, 2007 as compared to $175.6 million at September 30, 2006.

Peoples Bank operates entirely in North Carolina, with eleven offices throughout Catawba County, one office in Alexander County, three offices in Lincoln County, three offices in Mecklenburg County and one office in Union County.  The Company’s common stock is publicly traded over the counter and is quoted on the Nasdaq Global Market under the symbol “PEBK.”

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 to 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, 2006.

7

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FOUR
CONSOLIDATED BALANCE SHEETS
September 30, 2007, December 31, 2006 and September 30, 2006
	September 30, 2007			December 31, 2006			September 30, 2006
	(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	24,187,186		$	18,860,318		$	19,727,439
Federal funds sold		2,458,000			2,640,000			2,258,000
Cash and cash equivalents		26,645,186			21,500,318			21,985,439
Investment securities available for sale		120,210,033			117,581,000			118,584,586
Other investments		5,961,447			7,295,449			6,822,949
Total securities		126,171,480			124,876,449			125,407,535
Loans		689,362,842			651,381,129			624,302,284
Mortgage loans held for sale		-			-			1,289,217
Less:  Allowance for loan losses		(8,687,033	)		(8,303,432	)		(8,132,844	)
Net loans		680,675,809			643,077,697			617,458,657
Premises and equipment, net		17,239,716			12,816,385			12,870,691
Cash surrender value of life insurance		6,713,988			6,532,406			6,466,938
Accrued interest receivable and other assets		9,927,386			10,144,283			10,811,108
Total assets	$	867,373,565		$	818,947,538		$	795,000,368
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	116,792,169		$	101,393,142		$	98,155,787
NOW, MMDA & Savings		189,087,635			174,577,641			170,887,226
Time, $100,000 or more		188,982,647			194,176,291			175,609,612
Other time		180,586,078			163,673,215			161,831,432
Total deposits		675,448,529			633,820,289			606,484,057
Demand notes payable to U.S. Treasury		1,600,000			1,600,000			1,600,000
Securities sold under agreement to repurchase		20,315,345			6,417,803			8,602,041
FHLB borrowings		77,000,000			89,300,000			78,800,000
Junior subordinated debentures		20,619,000			20,619,000			35,052,000
Accrued interest payable and other liabilities		4,061,992			4,355,073			3,594,467
Total liabilities		799,044,866			756,112,165			734,132,565
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 5,650,020 shares in 2007
and 3,830,634 shares in 2006		49,124,903			51,122,147			50,674,267
Retained earnings		18,814,608			12,484,463			11,272,225
Accumulated other comprehensive income (loss)		389,188			(771,237	)		(1,078,689	)
Total shareholders' equity		68,328,699			62,835,373			60,867,803
Total liabilities and shareholders' equity	$	867,373,565		$	818,947,538		$	795,000,368

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FIVE
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2007 and 2006
	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	14,095,485		$	12,907,042		$	41,466,693		$	36,187,827
Interest on federal funds sold		32,634			40,818			367,331			62,020
Interest on investment securities:
U.S. Government agencies		1,150,619			1,114,266			3,411,555			3,206,274
States and political subdivisions		220,344			201,248			661,536			587,409
Other		125,663			126,404			363,625			389,311
Total interest income		15,624,745			14,389,778			46,270,740			40,432,841
INTEREST EXPENSE:
NOW, MMDA & savings deposits		1,077,858			817,878			2,975,499			2,174,238
Time deposits		4,378,968			3,715,792			12,983,826			10,136,246
FHLB borrowings		964,334			909,702			2,781,347			2,763,657
Junior subordinated debentures		371,225			700,220			1,095,572			1,277,540
Other		245,997			99,234			543,468			183,077
Total interest expense		7,038,382			6,242,826			20,379,712			16,534,758
NET INTEREST INCOME		8,586,363			8,146,952			25,891,028			23,898,083
PROVISION FOR LOAN LOSSES		296,000			686,282			1,253,000			1,858,282
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		8,290,363			7,460,670			24,638,028			22,039,801
NON-INTEREST INCOME:
Service charges		1,082,248			976,515			3,017,921			2,918,390
Other service charges and fees		488,737			394,030			1,423,461			1,153,059
Gain (loss) on sale of securities		(367,430	)		(163,702	)		(561,832	)		(337,453	)
Mortgage banking income		135,863			115,802			435,475			355,678
Insurance and brokerage commission		177,140			80,523			408,704			294,206
Miscellaneous		490,602			639,683			1,543,955			1,605,443
Total non-interest income		2,007,160			2,042,851			6,267,684			5,989,323
NON-INTEREST EXPENSE:
Salaries and employee benefits		3,235,765			3,001,507			9,907,668			8,714,719
Occupancy		1,204,188			1,049,911			3,518,721			3,055,732
Other		1,774,127			1,735,066			4,988,601			4,871,335
Total non-interest expenses		6,214,080			5,786,484			18,414,990			16,641,786
INCOME BEFORE INCOME TAXES		4,083,443			3,717,037			12,490,722			11,387,338
INCOME TAXES		1,470,800			1,344,300			4,500,841			4,118,100
NET INCOME	$	2,612,643		$	2,372,737		$	7,989,881		$	7,269,238
PER SHARE AMOUNTS
Basic net income	$	0.46		$	0.42		$	1.40		$	1.28
Diluted net income	$	0.45		$	0.41		$	1.37		$	1.26
Cash dividends	$	0.12		$	0.07		$	0.29		$	0.21
Book value	$	12.09		$	10.64		$	12.09		$	10.64

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE SIX
FINANCIAL HIGHLIGHTS
For the three and nine months ended September 30, 2007 and 2006
	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for sale securities	$	120,507,482		$	119,760,454		$	120,390,142		$	118,191,325
Loans		672,561,916			608,628,890			654,197,497			595,203,134
Earning assets		803,686,601			739,620,439			792,091,510			723,063,827
Assets		849,343,069			779,022,149			835,890,065			762,289,868
Deposits		658,620,691			605,544,233			652,900,510			598,891,616
Shareholders' equity		67,515,802			59,763,341			69,321,766			60,435,124
SELECTED KEY DATA:
Net interest margin (tax equivalent)		4.34%			4.47%			4.48%			4.52%
Return of average assets		1.22%			1.21%			1.28%			1.27%
Return on average shareholders' equity		15.35%			15.75%			15.41%			16.08%
Shareholders' equity to total assets (period end)		7.88%			7.66%			7.88%			7.66%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	8,514,417		$	7,922,419		$	8,303,432		$	7,424,782
Provision for loan losses		296,000			686,282			1,253,000			1,858,282
Charge-offs		(224,776	)		(519,833	)		(1,178,791	)		(1,420,320	)
Recoveries		101,392			43,976			309,392			270,100
Balance, end of period	$	8,687,033		$	8,132,844		$	8,687,033		$	8,132,844
ASSET QUALITY:
Non-accrual loans							$	6,691,661		$	3,149,424
90 days past due and still accruing								369,289			-
Other real estate owned								260,768			650,261
Repossessed assets								-			20,000
Total non-performing assets							$	7,321,718		$	3,819,685
Non-performing assets to total assets								0.84%			0.48%
Allowance for loan losses to non-performing assets								118.65%			212.92%
Allowance for loan losses to total loans								1.26%			1.30%
(END)