AnnuAl RepoRt Focused on the Future. True to Our Past. Mission stAteMent To Provide Exceptional Customer Service While Selling to Customer Needs AnnuAl RepoRt Contents MessAge FRoM the pResident FinAnCiAl highlights RepoRt oF independent RegisteRed publiC ACCounting FiRM ConsolidAted bAlAnCe sheets ConsolidAted stAteMents oF eARnings boARd oF diReCtoRs And oFFiCeRs subsidiARies shAReholdeR And geneRAl inFoRMAtion 2 4 5 6 7 8 9 9 loCAtions bACk FRoM the pResident It is a great honor for me to address you as the 10th President and Chief Executive Officer of Peoples Bancorp of North Carolina. I realize that I am following in the footsteps of numerous visionary leaders who have led Peoples Bank during its 100-year history to become one of the region’s strongest community-based financial organizations. I am grateful for the capable leadership of my immediate predecessor, Tony W. Wolfe. He directed the successful growth of the Bank to the seven county footprint that exists today. My pledge, along with all of the employees at Peoples Bank, is to continue to build upon the success of those who have served before us. We are pleased to report that 2012 was a profitable year for Peoples Bancorp as consolidated net earnings totaled $5.8 million, or $1.04 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion. For the previous fiscal year ended December 31, 2011, consolidated net earnings amounted to $5.2 million, or $0.93 basic and diluted net earnings per share, before adjustment for preferred stock dividends and accretion. After adjusting for dividends and accretion on preferred stock, net earnings available to common shareholders for the year ended December 31, 2012 were $4.8 million, or $0.86 basic and diluted net earnings per common share, as compared to $3.8 million, or $0.68 basic and diluted net earnings per common share, for the year ended December 31, 2011. Peoples Bancorp maintained its status as a “well- capitalized” financial institution as defined by regulatory agencies throughout 2012. Our risk-based capital ratio was 17.34% as of December 31, 2012. Shareholders’ equity was $97.7 million, or 9.6% of total assets, as of December 31, 2012, compared to $103.0 million, or 9.7% of total assets, as of December 31, 2011. During 2012, the Company purchased and retired 12,530 shares of its 25,054 outstanding shares of preferred stock from the U.S. Department of the Treasury. Our directors were pleased to continue paying quarterly cash dividends during 2012 as well as a special year-end cash dividend. Total assets amounted to $1.0 billion as of December 31, 2012, as compared to $1.1 billion as of December 31, 2011. Available for sale securities decreased 7.3% to $297.8 million as of December 31, 2012, compared to $321.4 million one year ago. This decrease reflected investment securities sold and paydowns of mortgage- backed securities during the year ended December 31, 2012, which were partially offset by purchases of investment securities. Total loans amounted to $620.0 million as of December 31, 2012, compared to $670.5 million as of December 31, 2011. This decrease was primarily the result of normal principal repayments on existing loans combined with the resolution of problem loans exceeding new loan originations. Non-performing assets continue to decrease, declining to $26.3 million, or 2.6% of total assets at December 31, 2012, compared to $32.1 million, or 3.0% of total assets at December 31, 2011. The allowance for loan losses at December 31, 2012 was $14.4 million, or 2.3% of loans, which management believes is adequate, compared to $16.6 million, or 2.5% of total loans at December 31, 2011. Total deposits amounted to $781.5 million as of December 31, 2012, compared to $827.1 million at December 31, 2011. Core deposits increased $13.4 million to $646.4 million at December 31, 2012, pAge 2 as compared to $633.0 million at December 31, 2011. Certificates of deposit in amounts greater than $100,000 totaled $134.7 million at December 31, 2012, as compared to $193.0 million at December 31, 2011. This decrease was attributable to a $25.6 million decrease in brokered certificates of deposit combined with a decrease in retail certificates of deposit as part of our pricing strategy to allow maturing high-cost certificates of deposit to roll-off. Adding to the excitement and success that we enjoyed during 2012 was the celebration of our 100th Business Anniversary. Numerous events were hosted throughout the year in recognition of this important milestone. We are grateful for participation among shareholders, bank associates, customers, and affiliates who helped make our Centennial Year one to be remembered. Services, Investment We would also remind you of our two Bank-owned Inc. subsidiaries—Peoples 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) in our 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 continues to assist Peoples Bank and other community banks with appraisal management services. Let me close by thanking our directors, officers, staff, and strategic partners for the opportunity of working with each of you as we move forward into our next century of service. If you are a shareholder of Peoples Bancorp, please reserve the date of Thursday, May 2, 2013 as we gather for the 101st Annual Meeting of Shareholders at Catawba Country Club. The meeting will begin at 11: 00 a.m. followed by our traditional shareholder luncheon. We hope you can attend. Thank you for your continued support of Peoples Bank. Sincerely, Lance A. Sellers President and Chief Executive Officer tony W. WolFe, peoples bAnk’s 9th pResident Mr. Wolfe joined Peoples Bank on March 5, 1990. He was elected President and CEO on December 22, 1993. He exemplified the attributes of executive leadership, moral integrity and a visionary work ethic throughout his twenty- two year career at our Company. He consistently demonstrated an untiring commitment on behalf of fellow banking associates as a valued friend, mentor and advocate. Mr. Wolfe earned the respect of the Bank’s Directors, Officers and Employees, the communities serve by the Bank and a widely diverse group of banking peers. All of us wish him the very best in his retirement. pAge 3 AnnuAl RepoRt FinAnCiAl highlights December 31, 2012 and 2011 (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 and 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. 2012 2011 Change 39,245 7,696 31,549 4,924 26,625 12,537 31,782 1,587 5,793 1,010 4,783 0.86 0.18 9.10 15.18 605,551 297,823 1,013,516 781,525 97,747 0.56% 5.58% 20.96% 10.08% -13% -30% -8% -61% 23% -14% 7% -8% 12% -27% 27% 26% 125% 66% 8% -7% -7% -5% -6% -5% 45,259 10,946 34,313 12,632 21,681 14,513 29,572 1,463 5,159 1,393 3,766 0.68 0.08 5.49 14.06 653,893 321,388 1,067,063 827,111 103,027 0.48% 5.03% 11.78% 9.55% pAge 4 RepoRt oF Audit pAge 5 AnnuAl RepoRt ConsolidAted bAlAnCe sheets December 31, 2012 and 2011 • (dollars in thousands) Assets Cash and due from banks, including reserve requirements of $9,625 and $8,492 Interest bearing deposits Cash and cash equivalents 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 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 12,524 shares in 2012 and 25,054 shares in 2011 Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,613,495 shares in 2012 and 5,544,160 shares in 2011 Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity 2012 2011 32,617 16,226 48,843 297,823 5,599 303,422 22,532 6,704 29,236 321,388 5,712 327,100 6,922 5,146 619,974 (14,423) 605,551 15,874 13,273 6,254 13,377 1,013,516 670,497 (16,604) 653,893 16,896 12,835 7,576 14,381 1,067,063 161,582 371,719 134,733 113,491 781,525 34,578 70,000 20,619 9,047 915,769 136,878 366,133 193,045 131,055 827,111 39,600 70,000 20,619 6,706 964,036 12,524 24,758 48,133 31,478 5,612 97,747 1,013,516 48,298 26,895 3,076 103,027 1,067,063 $ $ $ $ Refer to Appendix A of Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 25, 2013, for a complete set of Consolidated Financial Statements. pAge 6 For the Years Ended December 31, 2012, 2011 and 2010 • (dollars in thousands, except per share amounts) ConsolidAted stAteMents oF eARnings Interest income: Interest and fees on loans Interest on due from banks 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 $ 2012 2011 2010 32,758 51 2,746 3,403 287 39,245 1,180 3,205 2,744 438 129 7,696 31,549 36,374 33 5,414 3,180 258 45,259 2,263 5,035 2,956 407 285 10,946 34,313 40,204 63 5,035 2,173 205 47,680 3,472 6,786 3,285 411 394 14,348 33,332 4,924 12,632 16,438 Net interest income after provision for loan losses 26,625 21,681 16,894 Non-interest 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 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 and diluted net earnings per common share Cash dividends declared per common share $ $ $ 4,764 1,940 - 1,218 1,229 517 (1,136) 4,005 12,537 16,426 5,236 10,120 31,782 7,380 1,587 5,793 1,010 4,783 0.86 0.18 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 0.08 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 Refer to Appendix A of Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 25, 2013, for a complete set of Consolidated Financial Statements. pAge 7 AnnuAl RepoRt boARd oF diReCtoRs And oFFiCeRs Peoples Bank and Peoples Bancorp Board of Directors Robert C. Abernethy Chairman of the Board Peoples Bancorp of North Carolina, Inc. and Peoples Bank President, Secretary and Treasurer Carolina Glove Company, Inc. James S. Abernethy President and Assistant Secretary Midstate Contractors, Inc. Douglas S. Howard Vice President, Secretary and Treasurer Denver Equipment of Charlotte, Inc. John W. Lineberger, Jr. President Lincoln Bonded Warehouse Company Gary E. Matthews President and Director Matthews Construction Company, Inc. 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 Peoples Bancorp Officers Lance A. Sellers A. Joseph Lampron, Jr. President and Chief Executive Officer Executive Vice President, Chief Financial Officer Joseph F. Beaman, Jr. and Corporate Treasurer Executive Vice President and Corporate Secretary William D. Cable, Sr. Executive Vice President, Assistant Corporate Treasurer and Assistant Corporate Secretary Peoples Bank Officers Lance A. Sellers Jan G. Griffin Kay F. Deal President and Chief Executive Officer First Vice President, Loan Operations Vice President, Business Center Manager, Joseph F. Beaman, Jr. Leslie D. Hambrick Conover Executive Vice President, Chief Administrative First Vice President, Internal Auditor Barbara K. Farnsworth Officer and Corporate Secretary Rafael Intriago Vice President, Business Center Manager, A. Joseph Lampron, Jr. First Vice President, Banco de la Gente Retail Lincolnton Executive Vice President, Chief Financial Officer Director William D. Cable, Sr. M. Beth LaBarbera Mark W. Gustafson Vice President, Investment Account Executive Executive Vice President, Chief Operating Officer First Vice President, Regional Sales Manager Tommie A. Hall Kimberly L. Boyd Connie P. Ollis Vice President, Loan Documentation Senior Vice President, Banking Support First Vice President, Compliance/Security Officer Diane L. Klein Jeffrey P. Gniadek Lucretia K. Rogers Vice President, Business Center Manager, Senior Vice President, Area Executive First Vice President, Regional Sales Manager James O. Perry Kyle E. Sigmon Viewmont E. Dean Lawing Senior Vice President, Retail Banking Manager First Vice President, Consumer Credit Vice President, Mortgage Lending Manager David E. Reitzel Tammy H. Stephens David S. Lewis, Jr. Senior Vice President, Real Estate Administration First Vice President, Director of Information Vice President, Business Development Officer Daniel F. Richard Senior Vice President, Area Executive Mark W. Sigmon Technology John M. Woods Wendy H. Moran Vice President, Business Center Manager, Triangle First Vice President, Area Executive Paula M. Parker Senior Vice President, Area Executive Angela J. Abernethy Vice President, Business Center Manager, Timothy P. Turner Vice President, Business Services Sales Manager Senior Vice President, Commercial Credit Velvet L. Bowman Claremont Lynn H. Poole Clifton A. Wike Senior Vice President, Area Executive Kimberly D. Bazzle First Vice President, Marketing J. LaShae Bock Vice President, Service Center Manager Christopher L. Brookshire Vice President, RAA/GAA Helga Y. Callaway Vice President, Business Center Manager, Catawba Hight D. Reid Vice President, Business Center Manager, West Vice President, Business Center Manager, Lincoln First Vice President, Human Resources Director David C. Brown Catawba Valley Blvd Shana R. Carpenter Jeanette R. Ringley Vice President, Business Center Manager, Newton First Vice President, Certified Financial Planner Vice President, Business Center Manager, Denver Lisa G. Treadaway Steven F. Cloninger Wendy E. Cordero Vice President, Deposit Operations Manager First Vice President, Commercial Credit Vice President, Banco de la Gente Mortgage Denise C. Williams George S. Earp First Vice President, Finance Manager Mary C. Craven Vice President, Business Center Manager, Cornelius Vice President, Business Center Manager, Mooresville/Gateway Ryan M. Waddle Vice President, Business Development Officer pAge 8 Peoples Bancorp Subsidiary Board of Directors and Officers subsidiARies Community Bank Real Estate Solutions, LLC Board of Directors Officers Robert C. Abernethy David E. Reitzel - President David E. Reitzel Christopher L Brookshire - Vice President Dan Ray Timmerman, Sr. Joseph F. Beaman, Jr. - Secretary Lance A. Sellers 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 Officers Board of Directors Officers Robert C. Abernethy Lance A. Sellers - President Robert C. Abernethy David E. Reitzel – President Billy L. Price, Jr., M.D. David C. Brown - Vice President and Dan Ray Timmerman, Sr. Lance A. Sellers – Vice President David C. Brown Larry E. Robinson Douglas S. Howard Lance A. Sellers Assistant Secretary Joseph F. Beaman, Jr. - Secretary A. Joseph Lampron, Jr. – Treasurer David E. Reitzel Lance A. Sellers Joseph F. Beaman, Jr. – Secretary A. Joseph Lampron, Jr. – Treasurer shAReholdeR And geneRAl inFoRMAtion Annual Meeting The Annual Meeting of Shareholders of Peoples Bancorp will be held at 11:00 a.m. on Thursday, May 2, 2013, 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. 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 Broadridge Corporate Issuer Solutions, Inc. P.O. Box 1342 Brentwood, NY 11717 www.broadridge.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 Company’s shareholders. The Plan provides for the full or partial reinvestment of cash dividends, optional cash purchases of the Company’s stock, safekeeping of the share certificates, liquidation of shares, and gifting of shares and enrollment of the designated recipients. Broadridge Corporate Issuer Solutions, Inc. is the Plan Administrator. For more information, one may call Peoples Bancorp at 828-464-5620 or 800-948-7195 or contact the Plan Administrator at 855-263-4988. 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 15, 2013, the Company had 720 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. pAge 9 AnnuAl RepoRt AnnuAl RepoRt 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 TheRealPeoplesBank.com Catawba 106 North Main Street Catawba, NC 28609 (828) 241-3123 Catawba Valley Boulevard 2050 Catawba Valley Blvd. SE Hickory, NC 28602 (828) 322-6372 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 Mooresville Gateway 125-E Trade Court Mooresville, NC 28117 (704) 663-0384 Viewmont 1333 2nd Street NE Hickory, NC 28601 (828) 345-6262 Newton 420 West A Street Newton, NC 28658 (828) 464-5663 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 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 Banco de la Gente Administrative Office 800 East Arrowood Road Charlotte, NC 28217 (704) 909-5460 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