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 26, 2010
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 26, 2010	5

Item 2.02. Results of Operations and Financial Condition

On July 26, 2010, Peoples Bancorp of North Carolina, Inc. issued a press release announcing second quarter 2010 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 26, 2010

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.

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 26, 2010	By:	/s/ A. Joseph Lampron
	A. Joseph Lampron
	Executive Vice President and Chief Financial Officer

EX-99.A

EXHIBIT (99)(a)
NEWS RELEASE
		July 26, 2010
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 earnings of $864,000 or $0.16 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, for the three months ended June 30, 2010 as compared to $1.4 million, or $0.25 basic and diluted net earnings per share, for the same period one year ago.  After adjusting for dividends and accretion on preferred stock, net earnings available to common shareholders for the three months ended June 30, 2010 were $515,000, or $0.09 basic and diluted net earnings per common share as compared to $1.0 million, or $0.18 basic and diluted net earnings per common share, for the same period one year ago.  Tony W. Wolfe, President and Chief Executive Officer, attributed the decrease in seco nd quarter earnings to an increase in provision for loan losses and a decrease in non-interest income, which were partially offset by a decrease in non-interest expense. Mr. Wolfe pointed out that net earnings from recurring operations for the three months ended June 30, 2010 were $678,000, or $0.12 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, as compared to second quarter 2009 net earnings from recurring operations of $526,000, or $0.09 basic and diluted net earnings per share.  This increase in recurring earnings reflects the Company’s efforts to control interest and non-interest expenses, which have offset the increase in the provision for loss on loans.

Year-to-date net earnings as of June 30, 2010 were $1.7 million, or $0.31 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, as compared to $2.0 million, or $0.36 basic and diluted net earnings per share, for the same period one year ago.  After adjusting for dividends and accretion on preferred stock, net earnings available to common shareholders for the six months ended June 30, 2010 were $1.0 million, or $0.19 basic and diluted net earnings per common share as compared to $1.4 million, or $0.26 basic and diluted net earnings per common share, for the same period one year ago.  The decrease in year-to-date earnings is primarily attributable to an increase in provision for loan losses and a decrease in non-interest income, which were partially offset by an incr ease in net interest income and a decrease in non-interest expense as discussed below.  Net earnings from recurring operations for the six months ended June 30, 2010 were $1.7 million, or $0.31 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, as compared to net earnings from recurring operations of $1.4 million, or $0.26 basic and diluted net earnings per share, for the same period one year ago.

Net interest income was $8.2 million for the three-month period ended June 30, 2010 and the three month period ended June 30, 2009.  Net interest income after the provision for loan losses decreased 16% to $5.0 million during the second quarter of 2010, compared to $5.9 million for the same period one year ago.  The provision for loan losses for the three months ended June 30, 2010 was $3.2 million as compared to $2.3 million for the same period one year ago, primarily attributable to a $9.4 million increase in non-accrual loans from June 30, 2009 to June 30, 2010 and a $1.9 million increase in net charge-offs during second quarter 2010 compared to second quarter 2009.

Recurring non-interest income amounted to $2.9 million for the three months ended June 30, 2010 and the three months ended June 30, 2009.  Net non-recurring gains of $236,000 for the three months ended June 30, 2010 included a $246,000 gain on

the sale of securities combined with $90,000 net gains on the disposition of assets, which were partially offset by a $100,000 write-down on an investment.  Management determined the market value of this investment had decreased significantly and was not a temporary impairment, therefore a write-down was appropriate during the second quarter of 2010.  Net non-recurring gains of $1.4 million for the three months ended June 30, 2009 included a $1.8 million gain on sale of securities, which was partially offset by the write-down of two investments totaling $397,000.

Non-interest expense decreased 11% to $7.1 million for the three months ended June 30, 2010, as compared to $8.0 million for the same period last year.  The decrease in non-interest expense included: (1) a decrease of $622,000 or 15% in salaries and benefits expense primarily due a $345,000 decrease in incentive expense and a $161,000 decrease in salary expense and (2) a decrease of $300,000 or 11% in non-interest expenses other than salary, employee benefits and occupancy expenses primarily due to a decrease of $238,000 in debit card expense.

Year-to-date net interest income as of June 30, 2010 increased to $16.3 million compared to $16.1 million for the same period one year ago.   This increase is primarily attributable to a reduction in interest expense due to a decrease in the cost of funds for time deposits.   Net interest income after the provision for loan losses decreased 11% to $10.7 million for the six months ended June 30, 2010, compared to $12.1 million for the same period one year ago.  The provision for loan losses for the six months ended June 30, 2010 was $5.6 million as compared to $4.0 million for the same period one year ago, primarily attributable to an increase in non-performing assets and a $2.2 million increase in net charge-offs during the six months ended June 30, 2010 compared to the same period last year.
60; Net charge-offs during the six months ended June 30, 2010 included $1.2 million on construction and acquisition and development loans, $1.2 million on mortgage loans and $1.6 million on non-real estate loans, which included $1.3 million on commercial loans.

Recurring non-interest income increased 3% to $5.7 million for the six months ended June 30, 2010, as compared to $5.5 million for the same period one year ago primarily due to a $242,000 increase in service charges and fees resulting from growth in the deposit base coupled with normal pricing changes.  Net non-recurring gains of $54,000 for the six months ended June 30, 2010 included a $268,000 gain on sale of securities, which was partially offset by a $100,000 write-down on an investment.  This $168,000 net gain on the sale and write-down of securities for the six months ended June 30, 2010 was partially offset by a $114,000 net loss on the disposition of assets.  Net non-recurring gains of $912,000 for the six months ended June 30, 2009 included a $1.8 million gain on sale of securities, which was par tially offset by write-downs of two securities totaling $645,000.  The $1.2 million net gain on the sale and write-down of securities for the six months ended June 30, 2009 was partially offset by a $239,000 loss on the disposition of assets.

Non-interest expense decreased 7% to $14.2 million for the six months ended June 30, 2010, as compared to $15.3 million for the same period last year. The decrease in non-interest expense included: (1) a decrease of $682,000 or 9% in salaries and benefits expense primarily due a $207,000 decrease in incentive expense and a $211,000 decrease in salary expense and (2) a net decrease of $389,000 or 8% in non-interest expenses other than salary, employee benefits and occupancy expenses primarily due to a decrease of $402,000 in debit card expense.

Total assets as of June 30, 2010 amounted to $1.1 billion, an increase of 7% compared to total assets of $1.0 billion at June 30, 2009.  This increase is primarily attributable to an increase in investment securities available for sale.  Available for sale securities increased 36% to $245.6 million as of June 30, 2010 compared to $180.5 million as of June 30, 2009.  This increase reflects the investment of additional funds received from growth in deposits and a decrease in loans.  Total loans amounted to $751.5 million as of June 30, 2010 compared to $778.2 million as of June 30, 2009.  This decrease reflects a decline in loan originations combined with continuing payments on existing loans.

Non-performing assets increased 27% to $36.6 million or 3.36% of total assets at June 30, 2010, compared to $28.8 million or 2.74% of total assets at December 31, 2009 primarily due to a $9.1 million increase in non-accrual loans.  Non-performing assets amounted to $25.4 million or 2.50% of total assets at June 30, 2009.  Non-performing loans include $13.6 million in construction and acquisition and development loans, $16.7 million in commercial and residential mortgage loans and $2.1 million in other loans at June 30, 2010 as compared to $4.8 million in construction and acquisition and development loans, $18.3 million in commercial and residential mortgage loans and $1.7 million in other loans as of December 31, 2009.  The allowance for loan losses at June 30, 2010 amounted to $17.0 million or 2.26% of t otal loans compared to $13.3 million or 1.71% of total loans at June 30, 2009.

Deposits amounted to $849.2 million as of June 30, 2010, representing an increase of 11% over deposits of $767.4 million at June 30, 2009.  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 $68.5 million or 13% to $596.7 million at June 30, 2010 as compared to $528.2 million at June 30, 2009.  Certificates of deposit in amounts greater than $100,000 or more totaled $246.3 million at June 30, 2010 as compared to $236.9 million at June 30, 2009.  This increase is primarily due to a $7.7 million increase in certificates of deposit issued through the Certificate of Deposit Account Registry Service (CDARS) as of June 30, 2010 compared to June 30, 2009.

Securities sold under agreement to repurchase amounted to $40.9 million at June 30, 2010 as compared to $36.8 million at June 30, 2009.

Shareholders’ equity was $101.4 million, or 9.32% of total assets, at June 30, 2010 as compared to $98.5 million, or 9.69% of total assets, at June 30, 2009.

Peoples Bank operates 22 offices entirely in North Carolina, with offices in Catawba, Alexander, Lincoln, Mecklenburg, Union, Iredell and Wake Counties.  The Company’s common stock is publicly traded 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 R 20;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 t he 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, 2009.

CONSOLIDATED BALANCE SHEETS
June 30, 2010, December 31, 2009 and June 30, 2009
(Dollars in thousands)
	June 30, 2010			December 31, 2009			June 30, 2009
	(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	51,568		$	29,633		$	22,208
Interest bearing deposits		2,142			1,707			1,428
Cash and cash equivalents		53,710			31,340			23,636
Certificates of deposits		1,407			3,345			-
Investment securities available for sale		245,556			195,115			180,493
Other investments		6,345			6,346			5,935
Total securities		251,901			201,461			186,428
Mortgage loans held for sale		1,856			2,840			2,717
Loans		751,505			778,056			778,220
Less:  Allowance for loan losses		(16,981	)		(15,413	)		(13,290	)
Net loans		734,524			762,643			764,930
Premises and equipment, net		17,235			17,947			17,704
Cash surrender value of life insurance		7,410			7,282			7,151
Accrued interest receivable and other assets		19,750			21,636			13,583
Total assets	$	1,087,793		$	1,048,494		$	1,016,149
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	119,332		$	117,636		$	111,582
NOW, MMDA & Savings		323,184			290,273			244,556
Time, $100,000 or more		246,279			233,142			236,856
Other time		160,442			168,292			174,361
Total deposits		849,237			809,343			767,355
Demand notes payable to U.S. Treasury		323			636			1,474
Securities sold under agreement to repurchase		40,903			36,876			36,768
Short-term Federal Reserve Bank borrowings		-			-			7,500
FHLB borrowings		70,000			77,000			77,000
Junior subordinated debentures		20,619			20,619			20,619
Accrued interest payable and other liabilities		5,318			4,797			6,974
Total liabilities		986,400			949,271			917,690
Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized
5,000,000 shares; issued and outstanding
25,054 shares in 2010 and 2009		24,546			24,476			24,406
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
5,539,056 shares in 2010 and 2009		48,269			48,269			48,269
Retained earnings		24,394			23,573			23,479
Accumulated other comprehensive income		4,184			2,905			2,305
Total shareholders' equity		101,393			99,223			98,459
Total liabilities and shareholders' equity	$	1,087,793		$	1,048,494		$	1,016,149

CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2010 and 2009
(Dollars in thousands, except per share amounts)
	Three months ended				Six months ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	10,162	$	10,875	$	20,253	$	21,941
Interest on federal funds sold		-		-		-		1
Interest on investment securities:
U.S. Government sponsored enterprises		1,196		1,326		2,601		2,562
States and political subdivisions		460		288		862		541
Other		61		34		93		59
Total interest income		11,879		12,523		23,809		25,104
INTEREST EXPENSE:
NOW, MMDA & savings deposits		911		686		1,777		1,277
Time deposits		1,746		2,485		3,622		5,456
FHLB borrowings		813		901		1,702		1,755
Junior subordinated debentures		101		148		198		329
Other		111		104		208		209
Total interest expense		3,682		4,324		7,507		9,026
NET INTEREST INCOME		8,197		8,199		16,302		16,078
PROVISION FOR LOAN LOSSES		3,179		2,251		5,561		4,017
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		5,018		5,948		10,741		12,061
NON-INTEREST INCOME:
Service charges		1,441		1,356		2,760		2,583
Other service charges and fees		559		503		1,161		1,096
Gain (loss) on sale and write-down of securities		146		1,399		168		1,151
Mortgage banking income		91		311		247		504
Insurance and brokerage commission		93		96		191		199
Miscellaneous		800		586		1,213		904
Total non-interest income		3,130		4,251		5,740		6,437
NON-INTEREST EXPENSES:
Salaries and employee benefits		3,433		4,056		6,953		7,635
Occupancy		1,301		1,278		2,652		2,633
Other		2,323		2,622		4,641		5,030
Total non-interest expense		7,057		7,956		14,246		15,298
EARNINGS BEFORE INCOME TAXES		1,091		2,243		2,235		3,200
INCOME TAXES		227		883		496		1,215
NET EARNINGS		864		1,360		1,739		1,985
Dividends and accretion on preferred stock		349		349		697		550
NET EARNINGS AVAILABLE TO
COMMON SHAREHOLDERS	$	515	$	1,011	$	1,042	$	1,435
PER COMMON SHARE AMOUNTS
Basic net earnings	$	0.09	$	0.18	$	0.19	$	0.26
Diluted net earnings	$	0.09	$	0.18	$	0.19	$	0.26
Cash dividends	$	0.02	$	0.07	$	0.04	$	0.17
Book value	$	13.78	$	13.39	$	13.78	$	13.39

FINANCIAL HIGHLIGHTS
For the three and six months ended June 30, 2010 and 2009
(Dollars in thousands)
	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for sale securities	$	209,596		$	149,677		$	200,474		$	141,288
Loans		761,587			779,733			768,888			779,915
Earning assets		994,350			952,552			987,339			937,996
Assets		1,083,262			1,007,690			1,071,648			992,842
Deposits		844,385			759,215			832,695			749,718
Shareholders' equity		101,230			100,517			101,288			101,588
SELECTED KEY DATA:
Net interest margin (tax equivalent)		3.44%			3.55%			3.45%			3.56%
Return of average assets		0.32%			0.54%			0.33%			0.40%
Return on average shareholders' equity		3.42%			5.42%			3.46%			3.94%
Shareholders' equity to total assets (period end)		9.32%			9.69%			9.32%			9.69%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	16,756		$	12,064		$	15,413		$	11,026
Provision for loan losses		3,179			2,251			5,561			4,017
Charge-offs		(3,122	)		(1,104	)		(4,254	)		(2,056	)
Recoveries		168			79			261			303
Balance, end of period	$	16,981		$	13,290		$	16,981		$	13,290
ASSET QUALITY:
Non-accrual loans							$	31,938		$	22,538
90 days past due and still accruing								453			916
Other real estate owned								4,208			1,972
Total non-performing assets							$	36,599		$	25,426
Non-performing assets to total assets								3.36%			2.50%
Allowance for loan losses to non-performing assets								46.40%			52.27%
Allowance for loan losses to total loans								2.26%			1.71%

LOAN RISK GRADE ANALYSIS:	Percentage of Loans
	By Risk Grade*
	6/30/2010	6/30/2009
Risk Grade 1 (excellent quality)	3.45%	3.74%
Risk Grade 2 (high quality)	16.26%	16.58%
Risk Grade 3 (good quality)	50.15%	59.87%
Risk Grade 4 (management attention)	17.86%	11.81%
Risk Grade 5 (watch)	6.04%	3.90%
Risk Grade 6 (substandard)	1.93%	1.19%
Risk Grade 7 (low substandard)	0.00%	0.00%
Risk Grade 8 (doubtful)	0.00%	0.00%
Risk Grade 9 (loss)	0.00%	0.00%
*Excludes non-accrual loans
At June 30, 2010 there were eleven relationships exceeding $1.0 million (which totaled $20.4 million) in the Watch risk grade, seven relationships exceeding $1.0 million in the Substandard risk grade (which totaled $15.4 million) and no relationships exceeding $1.0 million in the Low Substandard risk grade. These customers continue to meet payment requirements in accordance with the terms of the promissory notes on these loans.
(END)