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 25, 2011
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 25, 2011	5

2

Item 2.02. Results of Operations and Financial Condition

On July 25, 2011, Peoples Bancorp of North Carolina, Inc. issued a press release announcing second quarter 2011 earnings results.

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 25, 2011

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 25, 2011	By:	/s/ A. Joseph Lampron, Jr.
	A. Joseph Lampron, Jr.
	Executive Vice President and Chief Financial Officer

4

EX-99.A

EXHIBIT (99)(a)
NEWS RELEASE
		July 25, 2011
Contact:	Tony W. Wolfe
	President and Chief Executive Officer
	A. Joseph Lampron, Jr.
	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 $629,000 for the three months ended June 30, 2011, resulting in $0.11 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, as compared to $864,000, or $0.16 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, 2011, were $281,000 or $0.05 basic and diluted net earnings per common share as compared to $515,000, or $0.09 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 second quarter earnings to increases in non-interest expense and the provision for loan losses combined with a decrease in non-interest income, which were partially offset by an increase in net interest income.

Year-to-date net earnings as of June 30, 2011 were $2.0 million, or $0.36 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion, as compared to $1.7 million, or $0.31 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, 2011 were $1.3 million or $0.23 basic and diluted net earnings per common share as compared to $1.0 million, or $0.19 basic and diluted net earnings per common share, for the same period one year ago.  The increase in year-to-date earnings is primarily attributable to aggregate increases in net interest income and non-interest income, which were partially offset by increases in the provision for loan losses and non-interest expense, as discussed below.

Net interest income was $8.6 million for the three-month period ended June 30, 2011, compared to $8.2 million for the same period one year ago.  Net interest income after the provision for loan losses increased 4% to $5.2 million during the second quarter of 2011, compared to $5.0 million for the same period one year ago.  The provision for loan losses for the three months ended June 30, 2011, was $3.4 million as compared to $3.2 million for the same period one year ago.

Non-interest income amounted to $2.7 million for the three months ended June 30, 2011, as compared to $3.1 million for the same period last year.  This decrease is primarily attributable to a $428,000 decrease in miscellaneous non-interest income due to a $450,000 increase in net losses and write-downs on foreclosed properties for the three months ended June 30, 2011, as compared to the same period one year ago.

Non-interest expense increased 5% to $7.4 million for the three months ended June 30, 2011, as compared to $7.1 million for the same period last year.  The increase in non-interest expense included: (1) an increase of $240,000 or 7% in salaries and benefits expense, (2) an increase of $30,000 or 2% in occupancy expense and (3) an increase of $81,000 or 4% in non-interest expenses other than salary, employee benefits and occupancy expenses.

5

Year-to-date net interest income as of June 30, 2011 increased 5% to $17.1 million compared to $16.3 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 increased 1% to $10.8 million for the six months ended June 30, 2011, compared to $10.7 million for the same period one year ago.  The provision for loan losses for the six months ended June 30, 2011 was $6.3 million as compared to $5.6 million for the same period one year ago, primarily attributable to a $1.8 million increase in net charge-offs during the six months ended June 30, 2011 compared to the same period last year.  Net charge-offs during the six months ended June 30, 2011 included $3.1 million on acquisition, development and construction (AD&C) loans, $2.5 million on mortgage loans and $228,000 on non-real estate loans.

Non-interest income increased 10% to $6.3 million for the six months ended June 30, 2011, as compared to $5.7 million for the same period one year ago.  This increase is primarily attributable to a $1.1 million increase in gains on the sale of securities, which was partially offset by a $475,000 decrease in miscellaneous non-interest income due to a $593,000 increase in net losses and write-downs on foreclosed properties for the six months ended June 30, 2011, as compared to the same period one year ago.

Non-interest expense increased 4% to $14.8 million for the six months ended June 30, 2011, as compared to $14.2 million for the same period last year.  The increase in non-interest expense included: (1) an increase of $387,000 or 6% in salaries and benefits expense, (2) an increase of $44,000 or 2% in occupancy expense and (3) an increase of $101,000 or 2% in non-interest expenses other than salary, employee benefits and occupancy expenses.

Total assets amounted to $1.1 billion as of June 30, 2011 and June 30, 2010.  Available for sale securities increased 21% to $297.6 million as of June 30, 2011, compared to $245.6 million as of June 30, 2010.  This increase reflects the investment of additional funds received from the decrease in loans.  Total loans amounted to $692.8 million as of June 30, 2011, compared to $751.5 million as of June 30, 2010.  The decrease is primarily due to the anticipated reduction in existing loans as the Bank continues to work through problem loans and the continuing decline in loan originations.

Non-performing assets decreased 16% to $39.2 million or 3.66% of total assets at June 30, 2011, compared to $46.9 million or 4.40% of total assets at December 31, 2010 primarily due to a decrease in non-accrual loans.  Non-performing assets amounted to $36.6 million or 3.36% of total assets at June 30, 2010.  Non-performing loans include $19.3 million in AD&C loans, $12.1 million in commercial and residential mortgage loans and $784,000 in other loans at June 30, 2011, as compared to $23.1 million in AD&C loans, $16.2 million in commercial and residential mortgage loans and $1.0 million in other loans as of December 31, 2010.  The allowance for loan losses at June 30, 2011, amounted to $16.0 million or 2.31% of total loans compared to $17.0 million or 2.26% of total loans at June 30, 2010.  According to Mr. Wolfe, management believes the current level of the allowance for loan losses is adequate; however, there is no assurance that additional adjustments to the allowance will not be required because of changes in economic conditions, regulatory requirements or other factors.

Deposits amounted to $830.4 million as of June 30, 2011, compared to $849.2 million at June 30, 2010.  Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations less than $100,000, increased $18.7 million or 3% to $615.1 million at June 30, 2011, as compared to $596.4 million at June 30, 2010.  Certificates of deposit in amounts greater than $100,000 or more totaled $212.4 million at June 30, 2011, as compared to $246.3 million at June 30, 2010.  This decrease is primarily due to a $24.3 million decrease in certificates of deposit issued through the Certificate of Deposit Account Registry Service (CDARS) and a $7.7 million decrease in brokered certificates of deposit as of June 30, 2011, compared to June 30, 2010.

Securities sold under agreement to repurchase amounted to $44.5 million at June 30, 2011, as compared to $41.0 million at June 30, 2010.

6

Shareholders’ equity was $100.5 million, or 9.37% of total assets, at June 30, 2011, as compared to $96.9 million, or 9.07% of total assets, at December 31, 2010 and $101.4 million, or 9.32% of total assets, at June 30, 2010.

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 “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, 2010.

7

CONSOLIDATED BALANCE SHEETS
June 30, 2011, December 31, 2010 and June 30, 2010
(Dollars in thousands)
	June 30, 2011			December 31, 2010			June 30, 2010
	(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	38,792		$	22,521		$	51,568
Interest bearing deposits		2,843			1,456			2,142
Cash and cash equivalents		41,635			23,977			53,710
Certificates of deposits		735			735			1,407
Investment securities available for sale		297,606			272,449			245,556
Other investments		5,840			5,761			6,345
Total securities		303,446			201,461			251,901
Mortgage loans held for sale		1,967			3,814			1,856
Loans		692,813			726,160			751,505
Less:  Allowance for loan losses		(15,984	)		(15,493	)		(16,981	)
Net loans		676,829			710,667			734,524
Premises and equipment, net		17,513			17,334			17,235
Cash surrender value of life insurance		7,660			7,539			7,410
Accrued interest receivable and other assets		23,182			25,376			19,750
Total assets	$	1,072,967		$	1,067,652		$	1,087,793
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	132,288		$	114,792		$	119,332
NOW, MMDA & Savings		346,808			332,511			323,184
Time, $100,000 or more		212,440			241,366			246,279
Other time		138,874			150,043			160,442
Total deposits		830,410			838,712			849,237
Demand notes payable to U.S. Treasury		1,252			1,600			323
Securities sold under agreement to repurchase		44,512			34,094			40,903
FHLB borrowings		70,000			70,000			70,000
Junior subordinated debentures		20,619			20,619			20,619
Accrued interest payable and other liabilities		5,641			5,769			5,318
Total liabilities		972,434			970,794			986,400
Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized
5,000,000 shares; issued and outstanding
25,054 shares in 2011 and 2010		24,687			24,617			24,546
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
5,542,703 shares in 2011 and 5,541,413 in 2010		48,289			48,281			48,269
Retained earnings		24,644			23,573			24,394
Accumulated other comprehensive income		2,913			387			4,184
Total shareholders' equity		100,533			96,858			101,393
Total liabilities and shareholders' equity	$	1,072,967		$	1,067,652		$	1,087,793

CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2011 and 2010
(Dollars in thousands, except per share amounts)
	Three months ended					Six months ended
	June 30,					June 30,
	2011			2010		2011		2010
	(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	9,159		$	10,162	$	18,774	$	20,253
Interest on investment securities:
U.S. Government sponsored enterprises		1,413			1,196		2,494		2,601
States and political subdivisions		790			460		1,595		862
Other		60			61		116		93
Total interest income		11,422			11,879		22,979		23,809
INTEREST EXPENSE:
NOW, MMDA & savings deposits		601			911		1,319		1,777
Time deposits		1,277			1,746		2,681		3,622
FHLB borrowings		753			813		1,497		1,702
Junior subordinated debentures		101			101		200		198
Other		77			111		156		208
Total interest expense		2,809			3,682		5,853		7,507
NET INTEREST INCOME		8,613			8,197		17,126		16,302
PROVISION FOR LOAN LOSSES		3,368			3,179		6,318		5,561
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		5,245			5,018		10,808		10,741
NON-INTEREST INCOME:
Service charges		1,316			1,441		2,572		2,760
Other service charges and fees		528			559		1,109		1,161
Gain on sale of securities		181			146		1,256		168
Mortgage banking income		218			91		405		247
Insurance and brokerage commission		121			93		229		191
Miscellaneous		372			800		738		1,213
Total non-interest income		2,736			3,130		6,309		5,740
NON-INTEREST EXPENSES:
Salaries and employee benefits		3,673			3,433		7,340		6,953
Occupancy		1,331			1,301		2,696		2,652
Other		2,404			2,323		4,742		4,641
Total non-interest expense		7,408			7,057		14,778		14,246
EARNINGS BEFORE INCOME TAXES		573			1,091		2,339		2,235
INCOME TAXES		(56	)		227		349		496
NET EARNINGS		629			864		1,990		1,739
Dividends and accretion on preferred stock		348			349		697		697
NET EARNINGS AVAILABLE TO
COMMON SHAREHOLDERS	$	281		$	515	$	1,293	$	1,042
PER COMMON SHARE AMOUNTS
Basic net earnings	$	0.05		$	0.09	$	0.23	$	0.19
Diluted net earnings	$	0.05		$	0.09	$	0.23	$	0.19
Cash dividends	$	0.02		$	0.02	$	0.04	$	0.04
Book value	$	13.62		$	13.78	$	13.62	$	13.78

FINANCIAL HIGHLIGHTS
For the three and six months ended June 30, 2011 and 2010
(Dollars in thousands)
	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for sale securities	$	285,223		$	209,596		$	276,273		$	200,474
Loans		704,366			761,587			712,994			768,888
Earning assets		1,012,214			994,350			1,011,638			987,339
Assets		1,068,988			1,083,262			1,067,654			1,071,648
Deposits		833,436			844,385			836,684			832,695
Shareholders' equity		98,705			101,230			98,415			101,288
SELECTED KEY DATA:
Net interest margin (tax equivalent)		3.58%			3.44%			3.59%			3.45%
Return of average assets		0.24%			0.32%			0.38%			0.33%
Return on average shareholders' equity		2.52%			3.42%			4.08%			3.46%
Shareholders' equity to total assets (period end)		9.37%			9.32%			9.37%			9.32%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	15,410		$	16,756		$	15,493		$	15,413
Provision for loan losses		3,368			3,179			6,318			5,561
Charge-offs		(2,966	)		(3,122	)		(6,311	)		(4,254	)
Recoveries		172			168			484			261
Balance, end of period	$	15,984		$	16,981		$	15,984		$	16,981
ASSET QUALITY:
Non-accrual loans							$	30,997		$	31,938
90 days past due and still accruing								1,124			453
Other real estate owned								7,115			4,208
Total non-performing assets							$	39,236		$	36,599
Non-performing assets to total assets								3.66%			3.36%
Allowance for loan losses to non-performing assets								40.74%			46.40%
Allowance for loan losses to total loans								2.31%			2.26%

LOAN RISK GRADE ANALYSIS:	Percentage of Loans
	By Risk Grade*
	6/30/2011	6/30/2010
Risk Grade 1 (excellent quality)	3.30%	3.41%
Risk Grade 2 (high quality)	16.71%	16.08%
Risk Grade 3 (good quality)	48.58%	49.59%
Risk Grade 4 (management attention)	22.52%	17.66%
Risk Grade 5 (watch)	2.05%	5.98%
Risk Grade 6 (substandard)	2.07%	2.74%
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, 2011 there were four relationships exceeding $1.0 million (which totaled $5.7 million) in the Watch risk grade, three relationships exceeding $1.0 million in the Substandard risk grade (which totaled $6.9 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)