Annual Report: 2011 c o n t e n t s 1 2 4 5 6 7 8 9 | from the president | financial highlights 3 | report of independent registered public accounting firm | consolidated balance sheets | consolidated statements of earnings | special thanks to the abernethy family | board of directors | officers and subsidiaries | shareholder and general information Back | locations FR o m t h e PRe s i d e n t It is a pleasure to greet you on the occasion of our Bank’s Centennial Anniversary. Peoples Bank, the Company’s primary subsidiary, celebrated the 100th anniversary of its founding on January 1, 2012. Historical records indicate that the Bank was capitalized with ten thousand dollars in Catawba, North Carolina and actually generated a small profit during its first year of operation. In contrast to these humble beginnings, consolidated earnings at Peoples Bancorp of North Carolina, Inc. totaled $5.2 million, or $0.93 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion at December 31, 2011. Comparable results for the fiscal year ended December 31, 2010 amounted to $1.8 million, or $0.33 basic and diluted net earnings per share. After adjusting for dividends and accretion on preferred stock, net earnings available to common shareholders for the year ended December 31, 2011 were $3.8 million, or $0.68 basic and diluted net earnings per common share, as compared to $447,000, or $0.08 basic and diluted net earnings per common share, for fiscal year 2010. Throughout 2011, Peoples Bancorp maintained its status as a “well- capitalized” financial institution as defined by our regulatory agencies. The Company’s risk-based capital ratio was 17.38 % as of December 31, 2011. The preservation of our capital was established as a key initiative throughout the year as we continued to emerge from the most pronounced recessionary period in our nation’s history since the Great Depression. We were pleased to share a portion of the Company’s earnings with our shareholders in the form of quarterly cash dividends during 2011 which totaled $0.08 per common share. Additionally, we announced that our Board of Directors declared a special year-end cash dividend in the amount of $0.05 per common share. The dividend was paid on February 17, 2012 to common shareholders of record February 6, 2012. Asset growth was relatively unchanged during fiscal year 2011 as compared to 2010 and remained at $1.1 billion at December 31, 2011. Typically, growth in the Bank’s loan portfolio has been the primary driver of asset growth; however, total loans at our most recent year-end amounted to $670.5 million, representing a decrease of $55.7 million from December 31, 2010. We attributed the decrease in outstanding loans to the anticipated reduction in existing loans as we have continued to work through problem loans coupled with the continuing decline in loan originations due to the aftermath of recent economic challenges. Consequently, available for sale securities increased 18% to $321.4 million as of December 31, 2011, compared to $272.4 million as of December 31, 2010, reflecting the investment of funds received from the decrease in loans. It is encouraging to acknowledge that non-performing assets decreased 32% during 2011 to $32.1 million, or 3.01% of total assets, at year-end. On December 31, 2010, non-performing loans totaled $46.9 million, or 4.40% of total assets. The decrease in non-performing assets was primarily due to a decrease in non-accrual loans. The allowance for loan losses at year-end 2011 amounted to $16.6 million, or 2.48% of total loans whereas on December 31, 2010 the allowance for loan losses totaled $15.5 million, or 2.13% of total loans at that time. Management believes that 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. Total deposits decreased by $11.6 million to $827.1 million during fiscal year 2011. The reduction in deposit funding was attributed to a $24.5 million decrease in certificates of deposit issued through the Certificate of Deposit Account Registry Service (CDARS) coupled with a $12.7 million decrease in brokered certificates of deposit. The purpose of such decrease in deposits was in response to management’s strategy to reduce cost of funding, thereby improving our net interest margin. We are pleased to report that 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 $40.3 million, or 7%, to $633.0 million at December 31, 2011, as compared to $592.7 million at December 31, 2010. As we think about the success that Peoples Bank enjoyed during 2011, our thoughts immediately turn to the professional banking associates who have made this Company what it is today. Our employees have taken us to the next level in the fulfillment of our corporate mission of “providing exceptional customer service while selling to customer needs.” Even in the face of economic challenges, these talented individuals have focused their efforts to find solutions that bring added value to each financial relationship with which they are entrusted. Our employees are truly Peoples Bank’s greatest asset. In December 2011, I announced my intention to retire from Peoples Bank. Your Board of Directors has formed a Succession Committee to provide for an orderly transition of leadership to become effective, we anticipate, in the third quarter of this year. Serving as your President and Chief Executive Officer since 1993 has been the highlight of my banking career. Please know that I am indebted to our Board of Directors, shareholders, employees, customers, and our professional partners who have supported my efforts to make Peoples Bank a better and stronger financial institution. I firmly believe, however, that this Company’s best days lie ahead. I am also firmly convinced that members of the Bank’s current management team are poised to effectively lead us as we enter our second century of service to our constituents. As a shareholder, we hope that you will be able to join us for our Annual Meeting of Shareholders scheduled for Thursday, May 3, 2012. The meeting will be held at Catawba Country Club beginning at 11:00A.M. We will offer special recognition in tribute to Peoples Bank’s 100th Business Anniversary during the course of the meeting and would encourage your attendance at this special event in the life of your Bank. Please accept our appreciation for your continued support of Peoples Bancorp and its principle subsidiary, Peoples Bank. We would also remind you of our two Bank-owned subsidiaries – Peoples Investment Services, Inc. and Real Estate Advisory Services, Inc. At Peoples Investment Services, licensed financial advisors provide access to non-traditional deposit products including stocks, bonds, mutual funds, annuities, or other suitable monetary investments through our exclusive affiliation with Raymond James Financial Services, Inc. Real Estate Advisory Services, Inc. continues to provide real estate appraisals (both residential and commercial) to the Bank’s market area thereby becoming a source of added value to mortgage- related transactions. Lastly, operating as a wholly-owned subsidiary of Peoples Bancorp, Community Bank Real Estate Solutions, LLC was created to assist Peoples Bank and other community banks with appraisal management services. We are grateful for the opportunity to be your bank of choice and to assist in the attainment of your financial goals as we partner with you going forward. Sincerely, Tony W. Wolfe, President and Chief Executive Officer Fi n A n c i A l h i g h l i g h t s December 31, 2011 and 2010 (dollars in thousands, except per share amounts) Interest income Interest expense Net interest earnings Provision for loan losses Net interest earnings after provision for loan losses Non-interest income Non-interest expense Income taxes Net earnings Dividends and accretion of preferred stock Net earnings available to common shareholders Per Share of Common Stock Basic net earnings Diluted net earnings Cash dividends Market price at December 31 Book value at December 31 At Year-end Loans, net Available for sale securities Assets Deposits Shareholders’ equity $ $ $ $ Key Performance Ratios Return on average assets Return on average shareholders’ equity Dividend payout ratio * Average shareholders’ equity to total average assets * As a percentage of net earnings available to common shareholders. 2011 45,259 10,946 34,313 12,632 21,681 14,513 29,572 1,463 5,159 1,393 3,766 0.68 0.68 0.08 5.49 14.06 653,893 321,388 1,067,063 827,111 103,027 0.48% 5.03% 11.78% 9.55% 2010 Change -5% -24% 3% -23% 28% 5% 2% 13400% 180% 0% 743% 750% 750% 0% 5% 8% -8% 18% 0% -1% 6% 47,680 14,348 33,332 16,438 16,894 13,884 28,948 (11) 1,841 1,394 447 0.08 0.08 0.08 5.25 12.96 710,667 272,449 1,067,652 838,712 96,858 0.17% 1.81% 100.11% 9.42% PAge 2 • ANNUAL REPORT: 2011 PAge 3 • ANNUAL REPORT: 2011 c o n s o l i d At e d b A l A n c e s h e e t s December 31, 2011 and 2010 • (dollars in thousands) Assets Cash and due from banks, including reserve requirements of $8,492 and $8,698 Interest bearing deposits Cash and cash equivalents Certificates of deposit Investment securities available for sale Other investments Total securities Mortgage loans held for sale Loans Less allowance for loan losses Net loans Premises and equipment, net Cash surrender value of life insurance Other real estate Accrued interest receivable and other assets Total assets Liabilities and Shareholders’ Equity Deposits: Non-interest bearing demand NOW, MMDA & savings Time, $100,000 or more Other time Total deposits Demand notes payable to U.S. Treasury Securities sold under agreement to repurchase FHLB borrowings Junior subordinated debentures Accrued interest payable and other liabilities Total liabilities Commitments 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 Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,544,160 shares in 2011 and 5,541,413 shares in 2010 Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity 2011 2010 22,532 6,704 29,236 22,521 1,456 23,977 - 735 321,388 5,712 327,100 272,449 5,761 278,210 5,146 3,814 670,497 (16,604) 653,893 16,896 12,835 7,576 14,381 1,067,063 726,160 (15,493) 710,667 17,334 7,539 6,673 18,703 1,067,652 136,878 366,133 193,045 131,055 827,111 - 39,600 70,000 20,619 6,706 964,036 114,792 332,511 241,366 150,043 838,712 1,600 34,094 70,000 20,619 5,769 970,794 24,758 24,617 48,298 26,895 3,076 103,027 1,067,063 48,281 23,573 387 96,858 1,067,652 $ $ $ $ Refer to Appendix A of Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated April 2, 2012, for a complete set of Consolidated Financial Statements. PAge 4 • ANNUAL REPORT: 2011 c o n s o l i d At e d s tAt e m e n t s o F eA Rn i n g s For the Years Ended December 31, 2011, 2010 and 2009 • (dollars in thousands, except per share amounts) Interest income: Interest and fees on loans Interest on investment securities: U.S. Government sponsored enterprises States and political subdivisions Other Total interest income Interest expense: NOW, MMDA & savings deposits Time deposits FHLB borrowings Junior subordinated debentures Other Total interest expense Net interest income Provision for loan losses 2011 2010 2009 $ 36,407 40,267 43,211 5,414 3,180 258 45,259 2,263 5,035 2,956 407 285 10,946 34,313 5,035 2,173 205 47,680 3,472 6,786 3,285 411 394 14,348 33,332 5,461 1,242 123 50,037 2,965 9,687 3,577 546 412 17,187 32,850 12,632 16,438 10,535 Net interest income after provision for loan losses 21,681 16,894 22,315 Other income: Service charges Other service charges and fees Other than temporary impairment losses Gain on sale of securities Mortgage banking income Insurance and brokerage commissions Loss on sale and write-down of other real estate and repossessed assets Miscellaneous Total non-interest income Non-interest expense: Salaries and employee benefits Occupancy Other Total non-interest expense Earnings before income taxes Income tax expense (benefit) Net earnings Dividends and accretion of preferred stock Net earnings available to common shareholders Basic net earnings per common share Diluted net earnings per common share Cash dividends declared per common share $ $ $ $ 5,106 2,090 (144) 4,406 757 471 (1,322) 3,149 14,513 14,766 5,339 9,467 29,572 6,622 1,463 5,159 1,393 3,766 0.68 0.68 0.08 5,626 2,195 (291) 3,348 532 390 (704) 2,788 13,884 14,124 5,436 9,388 28,948 1,830 (11) 1,841 1,394 447 0.08 0.08 0.08 5,573 2,058 (723) 1,795 827 414 (501) 2,380 11,823 14,758 5,409 9,716 29,883 4,255 1,339 2,916 1,246 1,670 0.30 0.30 0.26 Refer to Appendix A of Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated April 2, 2012, for a complete set of Consolidated Financial Statements. PAge 5 • ANNUAL REPORT: 2011 A heA d F oR business A n d A heAR t F oR th e c om muni t y the Abernethy family: In Partnership with Peoples Bank Julius W. Abernethy, Sr. Julius W. Abernethy, Jr. It is with a sense of pride that our family has been associated with Peoples Bank over the decades. Our corporate minutes indicate that Julius Whitener Abernethy, Sr. first appeared on the scene at Peoples Bank when he attended the Company’s Annual Shareholders’ Meeting in 1927. To watch Peoples Bank grow from year to year has been a source of fulfillment for the Abernethy family because we know that such growth has translated into an enhanced quality of life for businesses, individuals, and families who live and operate their companies in the Bank’s service area. Companies have been enabled to expand which resulted in the creation of additional jobs and an increased tax base for municipalities. Individuals and families have been assisted in the attainment of personal financial goals and the education of their children and grandchildren. We also find satisfaction in the knowledge that Peoples Bank has always been a Company that has enjoyed giving back to the community in any number of ways. Without hesitation, employees have repeatedly embraced the philanthropic causes of such organizations as United Way, Race for the Cure, March of Dimes, Relay for Life, and many others. Local churches, schools, and civic clubs have been regular beneficiaries of Peoples Bank’s success. Economists seem to be consistent in their thinking that our nation is beginning to emerge from the worst economic downturn since the Great Depression. If they are correct, and we hope they are, it is our opinion that Peoples Bank is well-positioned for additional growth and profitability. Our family is justifiably proud of our directors, management team, and each professional banker who represents this Company. We are firmly convinced that it is because of their hard work and dedication to the principles upon which Peoples Bank was founded that we can celebrate our first century of service and look forward to continued success in the years ahead. Robert C. Abernethy Christine S. Abernethy James S. Abernethy PAge 6 • ANNUAL REPORT: 2011 b o A Rd o F d iRe c t o R s Peoples Bank and Peoples Bancorp Board of Directors Robert C. Abernethy Chairman of the Board Peoples Bancorp of North Carolina, Inc. and Peoples Bank Gary E. Matthews President and Director Matthews Construction Company, Inc. President, Secretary and Treasurer Carolina Glove Company, Inc. James S. Abernethy President and Assistant Secretary Midstate Contractors, Inc. Douglas S. Howard Owner Howard Ventures Secretary and Treasurer Denver Equipment of Charlotte, Inc. John W. Lineberger, Jr. President Lincoln Bonded Warehouse Company Billy L. Price, Jr., M.D. Managing Partner and Practitioner of Internal Medicine Catawba Valley Internal Medicine, PA Larry E. Robinson President and Chief Executive Officer The Blue Ridge Distributing Company, Inc. W. Gregory Terry Executive Vice President Drum and Willis-Reynolds Funeral Homes and Crematory Dan Ray Timmerman, Sr. President and Chief Executive Officer Timmerman Manufacturing, Inc. Benjamin I. Zachary President, Treasurer, General Manager and Director Alexander Railroad Company (left to right) W. Gregory Terry, James S. Abernethy, Douglas S. Howard, Benjamin I. Zachary, Gary E. Matthews, Robert C. Abernethy, Tony W. Wolfe, Dan Ray Timmerman, Sr., Billy L Price, Jr., M.D., Larry E. Robinson, John W. Lineberger, Jr. PAge 7 • ANNUAL REPORT: 2011 o F Fi c eR s A n d s u b s i d i A Ri e s Peoples Bancorp Officers Tony W. Wolfe President and Chief Executive Officer Joseph F. Beaman, Jr. A. Joseph Lampron, Jr. William D. Cable, Sr. Executive Vice President, Chief Financial Officer and Corporate Treasurer Executive Vice President and Assistant Corporate Treasurer Executive Vice President and Corporate Secretary Lance A. Sellers Executive Vice President and Assistant Corporate Secretary Peoples Bank Officers Tony W. Wolfe – President and Chief Executive M. Beth LaBarbera – First Vice President, Mark W. Gustafson – Vice President, Officer Regional Sales Manager Investment Account Executive Joseph F. Beaman, Jr. – Executive Vice President, Chief Administrative Officer and Corporate Secretary Lucretia K. Rogers – First Vice President, Tommie A. Hall – Vice President, Loan Regional Sales Manager Documentation Kyle E. Sigmon – First Vice President, Consumer Leslie D. Hambrick – Vice President, Internal A. Joseph Lampron, Jr. – Executive Vice Credit Auditor President, Chief Financial Officer Tammy H. Stephens – First Vice President, Rafael Intriago – Vice President, Banco de la Lance A. Sellers – Executive Vice President, Director of Information Technology Gente Operations Manager Chief Credit Officer Timothy P. Turner – First Vice President, Diane L. Klein – Vice President, Business Center William D. Cable, Sr. – Executive Vice Commercial Credit Manager, Viewmont President, Chief Operating Officer John M. Woods – First Vice President, Area E. Dean Lawing – Vice President, Mortgage Kimberly L. Boyd – Senior Vice President, Executive Lending Manager Banking Support Angela J. Abernethy – Vice President, David S. Lewis, Jr. – Vice President, Business James O. Perry – Senior Vice President, Retail Business Services Sales Manager Development Officer Banking Manager J. LaShae Bock – Vice President, Wendy H. Moran – Vice President, Business David E. Reitzel – Senior Vice President, Real Human Resources Director Center Manager, Triangle Estate Administration Velvet L. Bowman – Vice President, Service Connie P. Ollis – Vice President, Compliance Daniel F. Richard – Senior Vice President, Area Center Manager Officer Executive Christopher L. Brookshire – Vice Paula M. Parker – Vice President, Business Mark W. Sigmon – Senior Vice President, Area President, RAA/GAA Center Manager, Claremont Executive Helga Y. Callaway - Vice President, Business Hight D. Reid – Vice President, Business Center Clifton A. Wike – Senior Vice President, Area Center Manager, Catawba Valley Blvd Manager, West Lincoln Executive Kimberly D. Bazzle – First Vice President, Marketing Peggy W. Carpenter – Vice President, Business Center Manager, North Newton Jeanette R. Ringley – Vice President, Business Center Manager, Newton Shana R. Carpenter – Vice President, Business Lisa G. Treadaway – Vice President, Deposit David C. Brown – First Vice President, Certified Center Manager, Denver Operations Manager Financial Planner Wendy E. Cordero – Vice President, Banco de Joe S. Tripp – Vice President, Business Steven F. Cloninger – First Vice President, la Gente Mortgage Manager Development Officer Commercial Credit George S. Earp – First Vice President, Finance Jeffrey P. Gniadek – First Vice President, Area Executive Mary C. Craven – Vice President, Business Denise C. Williams – Vice President, Business Center Manager, Cornelius Center Manager, Mooresville/Gateway Kay F. Deal – Vice President, Business Center Manager, Conover Jan G. Griffin – First Vice President, Loan Barbara K. Farnsworth – Vice President, Operations Director Business Center Manager, Lincolnton Peoples Bancorp Subsidiary Board of Directors and Officers Community Bank Real Estate Solutions, LLC Board of Directors Robert C. Abernethy David E. Reitzel Dan Ray Timmerman, Sr. Tony W. Wolfe Officers David E. Reitzel – President Tony W. Wolfe – Vice President Joseph F. Beaman, Jr. – Secretary A. Joseph Lampron, Jr. – Treasurer Peoples Bank Subsidiaries’ Board of Directors and Officers Peoples Investment Services, Inc. Real Estate Advisory Services, Inc. Board of Directors Robert C. Abernethy Billy L. Price, Jr., M.D. David C. Brown Larry E. Robinson Douglas S. Howard Tony W. Wolfe Officers Tony W. Wolfe – President David C. Brown – Vice President and Assistant Secretary Joseph F. Beaman, Jr. – Secretary A. Joseph Lampron, Jr. – Treasurer Board of Directors Robert C. Abernethy Dan Ray Timmerman, Sr. David E. Reitzel Tony W. Wolfe Officers Tony W. Wolfe – President David E. Reitzel – Vice President Joseph F. Beaman, Jr. – Secretary A. Joseph Lampron, Jr. – Treasurer PAge 8 • ANNUAL REPORT: 2011 s h A Re h o l d eR A n d g e n eR A l i nF o Rm At i o n Annual Meeting The Annual Meeting of Shareholders of Peoples Bancorp will be held at 11:00 A.M. on Thursday, May 3, 2012, at the Catawba Country Club located at 1154 Country Club Road, Newton, North Carolina. Shareholders’ Luncheon Shareholders in attendance at the Annual Meeting are cordially invited to remain for a luncheon to be served immediately upon adjournment. Common Stock Peoples Bancorp common stock is listed on the NASDAQ (National Association of Securities Dealers Automated Quotations) Global Market, where our symbol is PEBK. Peoples Bancorp stock is marketed by Scott & Stringfellow, Inc. and Sterne Agee & Leach, Inc. Corporate Office Peoples Bancorp of North Carolina, Inc. 518 West C Street PO Box 467 Newton, NC 28658 828-464-5620 Stock Transfer Agent & Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 www.rtco.com Independent Auditors Porter Keadle Moore, LLC 235 Peachtree Street, NE Suite 1800 Atlanta, GA 30303 Dividend Reinvestment & Stock Purchase Peoples Bancorp offers a Dividend Reinvestment and Stock Purchase Plan for the benefit of the Corporation’s shareholders. The Plan provides for the full or partial reinvestment of cash dividends, optional cash purchases of the Corporation’s stock, safekeeping of the share certificates, liquidation of shares, and gifting of shares and enrollment of the designated recipients. Registrar and Transfer Company, Cranford, New Jersey, is the Plan Administrator. For more information, one may call the Investor Relations Department at Peoples Bancorp at 828-464-5620 or 800-948-7195 or contact the Plan Administrator at 800-368-5948. Shareholders of Peoples Bancorp are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefore. Such dividend payments are declared based upon the guidelines of North Carolina and federal banking law. As of March 16, 2012, the Company had 723 shareholders of record, not including the number of persons or entities whose stock is held in nominee or street name through various brokerage firms or banks. (left to right) Lance A. Sellers A. Joseph Lampron, Jr. William D. Cable, Sr. Tony W. Wolfe Joseph F. Beaman, Jr. PAge 9 • ANNUAL REPORT: 2011 Annual Report: 2011 TheRealPeoplesBank.com Peoples Bancorp Center 518 West C Street PO Box 467 Newton, NC 28658 (828) 464-5620 Toll-free (800) 948-7195 Customer Service Center (828) 466-1765 Toll-free (877) 802-1212 Banco de la Gente 6300 South Boulevard Charlotte, NC 28217 (704) 554-7494 Banco de la Gente 4451-A Central Avenue Charlotte, NC 28205 (704) 531-4571 Banco de la Gente 501 West Roosevelt Boulevard Monroe, NC 28110 (704) 261-2020 Banco de la Gente 4011 Capital Boulevard Suite 121 Raleigh, NC 27604 (919) 747-8000 Catawba 106 North Main Street Catawba, NC 28609 (828) 241-3123 Mooresville Gateway 125-E Trade Court Mooresville, NC 28117 (704) 663-0384 Catawba Valley Boulevard 2050 Catawba Valley Blvd. SE Hickory, NC 28602 (828) 322-6372 Newton 420 West A Street Newton, NC 28658 (828) 464-5663 Claremont 3261 East Main Street Claremont, NC 28610 (828) 459-7152 Conover 213 1st Street West Conover, NC 28613 (828) 464-8456 Cornelius 9624-I Bailey Road Cornelius, NC 28031 (704) 237-9270 Denver 6125 Highway 16 South Denver, NC 28037 (704) 483-3050 Hiddenite 5153 NC Highway 90 East Hiddenite, NC 28636 (828) 632-0118 (704) 585-6631 Lincolnton 1910 East Main Street Lincolnton, NC 28092 (704) 732-0097 Maiden 200 Island Ford Road Maiden, NC 28650 (828) 428-9874 Mooresville 1074 River Highway Mooresville, NC 28117 (704) 658-3600 North Newton 2619 North Main Avenue Newton, NC 28658 (828) 464-8664 Springs Road 3310 Springs Road NE Hickory, NC 28601 (828) 256-9229 Triangle 142 Highway 16 South Denver, NC 28037 (704) 483-7727 (704) 827-2370 Viewmont 1333 2nd Street NE Hickory, NC 28601 (828) 345-6262 West Lincoln 760 Highway 27 West Lincolnton, NC 28092 (704) 736-1447 Satellite Location Abernethy Laurels 102 Leonard Avenue Newton, NC 28658 (828) 464-3077 Denver Loan Production Office 3754 Highway 16 North Denver, NC 28037 (704) 489-8940