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):        July 21, 2008
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:
	o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
	o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
	o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
	o	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 July 21, 2008	5

2

Item 2.02. Results of Operations and Financial Condition

On July 21, 2008, Peoples Bancorp of North Carolina, Inc. issued a press release announcing second quarter 2008 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 July 21, 2008

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:  July 24, 2008	By:	/s/ A. Joseph Lampron
	A. Joseph Lampron
	Executive Vice President and Chief Financial Officer

4

EX-99.A

EXHIBIT (99)(a)
NEWS RELEASE
		July 21, 2008
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 SECOND QUARTER EARNINGS RESULTS

Peoples Bancorp of North Carolina, Inc. (NASDAQ: PEBK), the parent company of Peoples Bank, reported net income of $2.2 million, or $0.39 basic and diluted net income per share, for the three months ended June 30, 2008 as compared to $2.6 million or $0.45 basic net income per share and $0.44 diluted net income per share, for the same period one year ago.  Tony W. Wolfe, President and Chief Executive Officer, attributed the decrease in second quarter earnings to a decrease in net interest income, an increase in provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income.   Mr. Wolfe noted that, while earnings had declined in 2008 from the record levels achieved in 2007, the Company continues to achieve results that have kept Peoples Bancorp in the top quartile of public banks in North Carolina in terms of returns on assets and equity.

Year-to-date net income as of June 30, 2008 was $4.2 million, or $0.76 basic net income per share and $0.75 diluted net income per share as compared to $5.4 million, or $0.94 basic net income per share and $0.92 diluted net income per share, for the same period one year ago.  The decrease in year-to-date earnings is primarily attributable to a decrease in net interest income, an increase in provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income as discussed below.

Shareholders’ equity increased to $72.2 million, or 7.69% of total assets, at June 30, 2008 as compared to $65.4 million, or 7.79% of total assets, at June 30, 2007 as a result of net income earned less dividends paid for the period combined with a $3.7 million increase in accumulated other comprehensive income (loss) from June 30, 2007 to June 30, 2008.  The increase in accumulated other comprehensive income (loss) is due to an increase in the market value of available for sale securities and derivative instruments.

Net interest income for the quarter ended June 30, 2008 decreased 4% to $8.4 million compared to $8.7 million for the same period one year ago.  This decrease is primarily attributable to a 325 basis point reduction in the Bank’s prime commercial lending rate from June 30, 2007 to June 30, 2008.  The decrease in loan interest income resulting from a decline in prime rate was partially offset by an increase in income from derivative instruments.  Net income from derivative instruments was $899,000 for the three months ended June 30, 2008 compared to a net loss of $108,000 for the same period in 2007.  Net interest income after the provision for loan losses decreased 5% to $7.7 million during the second quarter of 2008, compared to $8.1 million for the same period one year ago.  The provision for loan losses for the three months ended June 30, 2008 was $681,000 as compared to $634,000 for the same period one year ago, primarily attributable to a $3.4 million increase in non-performing loans from June 30, 2007 to June 30, 2008 and increased loan growth.

Non-interest income increased 31% to $2.8 million for the three months ended June 30, 2008, as compared to $2.1 million for the same period one year ago.  Increases in components of non-interest income for the three months ended  June 30, 2008 compared to the same period last year include a $425,000 increase in service charges and fees resulting from growth in deposit

5

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS – PAGE TWO

base coupled with normal pricing changes and a $61,000 increase in miscellaneous income.  These increases in non-interest income were combined with a $194,000 decrease in the loss on sale of securities in second quarter 2008 when compared to second quarter 2007.

Non-interest expense increased 15% to $7.1 million for the three months ended June 30, 2008, as compared to $6.2 million for the same period last year.  The increase in non-interest expense is primarily due to an increase of $532,000 or 16% in salaries and benefits expense due to normal salary increases and expense associated with additional staff for new branches and a net increase of $430,000 or 26% 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 $118,000 in FDIC insurance expense, an increase of $118,000 in deposit program expense and an increase of $62,000 in consulting fees.

Year-to-date net interest income as of June 30, 2008 decreased 6% to $16.2 million compared to $17.3 million for the same period one year ago.   This decrease is primarily attributable to a reduction in the Bank’s prime commercial lending rate.   The decrease in loan interest income resulting from a decline in prime rate was partially offset by an increase in income from derivative instruments.  Net income from derivative instruments was $1.3 million for the six months ended June 30, 2008 compared to a net loss of $209,000 for the same period in 2007.  Net interest income after the provision for loan losses decreased 7% to $15.2 million for the six months ended June 30, 2008, compared to $16.3 million for the same period one year ago.  The provision for loan losses for the six months ended June 30, 2008 was $1.1 million as compared to $957,000 for the same period one year ago, primarily attributable to an increase in non-performing loans and increased loan growth.

Non-interest income increased 27% to $5.4 million for the six months ended June 30, 2008, as compared to $4.3 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 $800,000 resulting from growth in deposit base coupled with normal pricing changes, an increase of $97,000 in miscellaneous fee income and a $61,000 increase in mortgage banking income.

Non-interest expense increased 15% to $14.0 million for the six months ended June 30, 2008, as compared to $12.2 million for the same period last year. The increase in non-interest expense included: (1) an increase of $874,000 or 13% in salaries and benefits expense due to normal salary increases and expenses associated with additional staff for the new branches, (2) an increase of $110,000 or 5% in occupancy expense due to an increase in furniture and equipment expense and lease expense associated with new offices, and (3) a net increase of $860,000 or 27% 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 $228,000 in FDIC insurance expense, an increase of $188,000 in deposit program expense, an increase of $108,000 in advertising expense and an increase of $82,000 in consulting fees.

Total assets as of June 30, 2008 amounted to $938.5 million, an increase of 12% compared to total assets of $839.7 million at June 30, 2007.  This increase is primarily attributable to an increase in loans.  Loans increased 14% to $756.2 million as of June 30, 2008 compared to $663.1 million as of June 30, 2007.Premises and equipment increased $3.8 million to $18.2 million at June 30, 2008 as compared to $14.4 million at June 30, 2007 primarily due to the purchase of a previously leased branch office and costs associated with new offices.

Non-performing assets decreased 7% to $11.3 million or 1.20% of total assets at June 30, 2008, compared to $12.1 million or 1.33% of total assets at March 31, 2008 primarily due to a $1.5 million reduction in non-performing loans, which was partially offset by a $695,000 increase in other real estate owned.  Non-performing assets amounted to $8.5 million or 0.93% of total assets at December 31, 2007 and $7.2 million or 0.86% of total assets at June 30, 2007.  The allowance for loan losses at June 30, 2008 amounted to $9.6 million or 1.27% of total loans compared to $8.5 million or 1.28% of total loans at June 30, 2007.

6

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS – PAGE THREE

Deposits amounted to $722.6 million as of June 30, 2008, representing an increase of 10% over deposits of $654.1 million at June 30, 2007.  Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposits of denominations less than $100,000, increased $17.8 million to $494.1 million at June 30, 2008 as compared to $476.4 million at June 30, 2007 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 three new offices that have opened since May 2007.  The Bank also introduced remote deposit capture for customers in 2007, which has enabled the Bank to gather additional deposits from existing customers and has been helpful in attracting new customers.  Certificates of deposit in amounts greater than $100,000 or more totaled $223.5 million at June 30, 2008 as compared to $177.7 million at June 30, 2007.

Securities sold under agreement to repurchase increased $10.4 million to $27.6 million at June 30, 2008 as compared to $17.2 million at June 30, 2007 as concerted efforts to promote cash management services have increased customer usage of this product.

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, one office in Union County, one office in Iredell County and one office in Wake 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, 2007.

7

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE FOUR
CONSOLIDATED BALANCE SHEETS
June 30, 2008, December 31, 2007 and June 30, 2007
	June 30, 2008			December 31, 2007			June 30, 2007
	(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	24,290,917		$	26,108,437		$	25,344,996
Interest bearing deposits		1,429,735			1,539,190			1,543,698
Federal funds sold		2,621,000			2,152,000			2,757,000
Cash and cash equivalents		28,341,652			29,799,627			29,645,694
Investment securities available for sale		117,967,342			120,968,358			118,308,573
Other investments		6,752,809			6,433,947			5,961,447
Total securities		124,720,151			127,402,305			124,270,020
Loans		756,234,438			722,276,948			663,125,684
Less:  Allowance for loan losses		(9,641,646	)		(9,103,058	)		(8,514,417	)
Net loans		746,592,792			713,173,890			654,611,267
Premises and equipment, net		18,191,488			18,234,393			14,421,165
Cash surrender value of life insurance		6,897,928			6,776,379			6,651,597
Accrued interest receivable and other assets		13,759,668			11,875,202			10,074,654
Total assets	$	938,503,679		$	907,261,796		$	839,674,397
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	112,589,101		$	112,071,090		$	117,701,167
NOW, MMDA & Savings		206,660,495			196,959,895			183,721,294
Time, $100,000 or more		223,454,154			203,499,504			177,739,130
Other time		179,858,045			181,108,214			174,942,640
Total deposits		722,561,795			693,638,703			654,104,231
Demand notes payable to U.S. Treasury		1,464,114			1,600,000			1,092,438
Securities sold under agreement to repurchase		27,623,175			27,583,263			17,236,961
FHLB borrowings		87,000,000			87,500,000			77,000,000
Junior subordinated debentures		20,619,000			20,619,000			20,619,000
Accrued interest payable and other liabilities		7,025,015			6,219,248			4,228,148
Total liabilities		866,293,099			837,160,214			774,280,778
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 5,589,056 shares in 2008
and 5,624,234 shares in 2007		48,142,244			48,651,895			50,272,682
Retained earnings		22,176,749			19,741,876			16,882,082
Accumulated other comprehensive income (loss)		1,891,587			1,707,811			(1,761,145	)
Total shareholders' equity		72,210,580			70,101,582			65,393,619
Total liabilities and shareholders' equity	$	938,503,679		$	907,261,796		$	839,674,397

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE FIVE
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2008 and 2007
	Three months ended					Six months ended
	June 30,					June 30,
	2008		2007			2008		2007
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	12,628,268	$	13,771,019		$	25,672,732	$	27,371,208
Interest on federal funds sold		16,537		209,202			34,716		334,697
Interest on investment securities:
U.S. Government agencies		1,105,614		1,130,857			2,239,703		2,260,936
States and political subdivisions		216,237		221,698			442,781		441,192
Other		105,783		112,993			235,206		237,962
Total interest income		14,072,439		15,445,769			28,625,138		30,645,995
INTEREST EXPENSE:
NOW, MMDA & savings deposits		782,225		985,198			1,706,617		1,897,641
Time deposits		3,656,593		4,318,455			7,931,064		8,604,858
FHLB borrowings		884,124		893,523			1,830,785		1,817,013
Junior subordinated debentures		230,650		364,148			557,397		724,347
Other		146,117		173,193			353,749		297,471
Total interest expense		5,699,709		6,734,517			12,379,612		13,341,330
NET INTEREST INCOME		8,372,730		8,711,252			16,245,526		17,304,665
PROVISION FOR LOAN LOSSES		681,000		634,000			1,072,000		957,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		7,691,730		8,077,252			15,173,526		16,347,665
NON-INTEREST INCOME:
Service charges		1,256,640		1,023,105			2,403,483		1,935,673
Other service charges and fees		638,624		447,177			1,267,402		934,724
Gain (loss) on sale of securities		-		(194,402	)		-		(194,402	)
Mortgage banking income		181,464		187,771			360,521		299,612
Insurance and brokerage commission		119,633		130,907			226,374		231,564
Miscellaneous		605,441		544,082			1,150,542		1,053,353
Total non-interest income		2,801,802		2,138,640			5,408,322		4,260,524
NON-INTEREST EXPENSE:
Salaries and employee benefits		3,830,925		3,298,737			7,545,460		6,671,903
Occupancy		1,181,803		1,210,294			2,424,277		2,314,533
Other		2,100,710		1,670,833			4,074,066		3,214,474
Total non-interest expenses		7,113,438		6,179,864			14,043,803		12,200,910
INCOME BEFORE INCOME TAXES		3,380,094		4,036,028			6,538,045		8,407,279
INCOME TAXES		1,188,300		1,445,915			2,291,800		3,030,041
NET INCOME	$	2,191,794	$	2,590,113		$	4,246,245	$	5,377,238
PER SHARE AMOUNTS
Basic net income	$	0.39	$	0.45		$	0.76	$	0.94
Diluted net income	$	0.39	$	0.44		$	0.75	$	0.92
Cash dividends	$	0.12	$	0.09		$	0.24	$	0.17
Book value	$	12.92	$	11.45		$	12.92	$	11.45

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE SIX
FINANCIAL HIGHLIGHTS
For the three and six months ended June 30, 2008 and 2007
	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for sale securities	$	115,977,780		$	120,285,416		$	117,130,589		$	120,330,498
Loans		735,847,936			646,594,679			728,241,578			644,863,090
Earning assets		864,220,269			790,590,737			857,005,523			786,197,864
Assets		920,166,469			835,824,430			911,163,418			829,052,067
Deposits		713,031,907			654,938,694			704,417,600			649,993,055
Shareholders' equity		74,547,584			67,355,184			75,048,567			67,627,076
SELECTED KEY DATA:
Net interest margin (tax equivalent)		3.99%			4.52%			3.91%			4.54%
Return of average assets		0.96%			1.24%			0.94%			1.31%
Return on average shareholders' equity		11.83%			15.42%			11.38%			16.03%
Shareholders' equity to total assets (period end)		7.69%			7.79%			7.69%			7.79%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	9,369,730		$	8,620,074		$	9,103,058		$	8,303,432
Provision for loan losses		681,000			634,000			1,072,000			957,000
Charge-offs		(496,731	)		(822,877	)		(688,170	)		(954,015	)
Recoveries		87,647			83,220			154,758			208,000
Balance, end of period	$	9,641,646		$	8,514,417		$	9,641,646		$	8,514,417
ASSET QUALITY:
Non-accrual loans							$	9,818,543		$	6,677,065
90 days past due and still accruing								413,433			181,218
Other real estate owned								1,060,095			334,807
Total non-performing assets							$	11,292,071		$	7,193,090
Non-performing assets to total assets								1.20%			0.86%
Allowance for loan losses to non-performing assets								85.38%			118.37%
Allowance for loan losses to total loans								1.27%			1.28%
LOAN RISK GRADE ANALYSIS:							Percentage of Loans
							By Risk Grade*
							6/30/2008			6/30/2007
Risk 1 (excellent quality)								9.91%			12.66%
Risk 2 (high quality)								13.38%			13.17%
Risk 3 (good quality)								66.53%			61.27%
Risk 4 (management attention)								7.17%			10.21%
Risk 5 (watch)								1.29%			1.10%
Risk 6 (substandard)								0.42%			0.53%
Risk 7 (low substandard)								0.00%			0.04%
Risk 8 (doubtful)								0.00%			0.00%
Risk 9 (loss)								0.00%			0.00%
*Excludes non-accrual loans
At June 30, 2008 there were two relationships exceeding $1.0 million (which totaled $5.6 million) in the Watch risk grade, one relationship exceeding $1.0 million in the Substandard risk grade (which totaled $1.9 million) and no relationships exceeding $1.0 million in the Low Substandard risk grade. These customers continue to meet payment requirements and these relationships would not become non-performing assets unless they are unable to meet those requirements.
(END)