2015 | Annual Report OUR MISSION To provide Exceptional Customer Service while selling to customer needs. 2015 ANNUAL REPORT OUR VISION To be the Bank of Choice in our communities, including employees, customers and shareholders. Message from the President Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Earnings Board of Directors and Officers Subsidiaries Shareholder and General Information Locations 2 4–5 6 7 8 9 9 Back FROM THE PRESIDENT For the one hundred and third year, An ongoing focus for us is the Peoples Bancorp of North Carolina, preservation of our capital base. We are Inc., is pleased to present an Annual committed to maintaining a capital ratio Report of business activity. We are very that exceeds regulatory guidelines and aware that shareholder loyalty along results in our designation as a “well- with the outstanding performance of capitalized” financial institution. So we the Company’s employees have made it are glad to report, as of December 31, possible for us to be successful for such a 2015 shareholders’ equity was $104.9 long time. The highlight of this year’s Annual Report would be our earnings, which were the highest annual earnings in the history of the Company. Net earnings for last year were $9.6 million. You’ll see more performance results in the paragraphs below. million, or 10.1% of total assets, compared to $98.7 million, or 9.5% of total assets, as of December 31, 2014. This increase is primarily due to an increase in retained earnings due to net income, which was partially offset by a decrease in common stock due to 102,050 shares of common stock repurchased during 2015 under the Company’s stock repurchase program Year-to-date net earnings as of December implemented in September 2014. 31, 2015 were $9.6 million, or $1.73 basic net earnings per share and $1.72 diluted net earnings per share, as compared to $9.4 million, or $1.67 basic net earnings per share and $1.66 diluted net earnings per share for the same period one year ago. The increase in year-to-date earnings is primarily attributable to an increase in net interest income and an increase in non-interest income, which were partially offset by a decrease in the credit to the provision for loan losses and an increase in non-interest expense. The Bank continues to make progress in addressing the issues identified in the FDIC Consent Order issued in August, 2015 and expects that it will be able to undertake and implement all required actions within the required time period. Total assets were $1.0 billion as of December 31, 2015 and 2014. Non- performing assets declined to $9.2 million or 0.88% of total assets at December 31, 2015, compared to $12.7 million or 1.2% of total assets at December 31, 2014. The decline in non-performing assets is due to a $2.3 million decrease in non-accrual loans and a $1.3 million decrease in other real estate owned properties. The allowance for loan losses at December 31, 2015 was $9.6 million or 1.4% of total loans, compared to $11.1 million or 1.7% of total loans at December 31, 2014. 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. Lance A. Sellers President and Chief Executive Officer page 2 2015 | ANNUAL REPORT Deposits amounted to $832.2 million as of December Peoples Investment Services, Inc., licensed financial 31, 2015, compared to $814.7 million at December advisors who provide access to investment products, 31, 2014. Core deposits, which include noninterest- which include stocks, bonds, mutual funds, annuities, bearing demand deposits, NOW, MMDA, savings and and other suitable monetary investments through our non-brokered certificates of deposit of denominations affiliation with Raymond James Financial Services, Inc. less than $250,000, increased $45.4 million to $801.2 million at December 31, 2015, as compared to $755.8 million at December 31, 2014. We are pleased with the continued level of growth in core deposits as such deposits represent the most cost effective way to fund our earning assets. Certificates of deposit in amounts of $250,000 or more totaled $26.9 million at December 31, 2015, as compared to $47.9 million at December 31, 2014. The decrease in certificates of deposit in amounts Real Estate Advisory Services, Inc., which provides real estate appraisals (both residential and commercial) to Peoples Bancorp’s market area, thereby becoming a valued partner with respect to mortgage-related transactions. Community Bank Real Estate Solutions, LLC, created in response to the Dodd-Frank Act to assist community banks across the country with appraisal management of $250,000 or more is attributable to a $7.1 million services. decrease in wholesale certificates of deposit combined with a decrease in retail certificates of deposit which was expected as part of the Bank’s pricing strategy to allow maturing high cost certificates of deposit to roll-off. Our Bank’s vision is to become “the Bank of Choice” in all the communities we serve. We’re encouraged that our past performance indicates we are the right bank at The Annual Shareholders Meeting is scheduled for Thursday, May 5, 2016, at the Catawba Country Club beginning at 11:00 A.M. I hope each and every shareholder will attend the Annual Meeting. I want to express my appreciation for the loyalty and support of each of our shareholders, whom we hope will recommend our Bank and subsidiary companies to the right time for many of the families and businesses members of their communities. in our footprint. We continue to make the investment in products, services and people to accomplish our mission, which is to provide exceptional customer service while selling to customer needs. Our employees consistently Sincerely, earn high marks from our customers, and I want to congratulate each of them for the hard work to make our Company a success. Lance A. Sellers President and Chief Executive Officer The Directors of Peoples Bancorp play a direct and critical role in the success of our Company. They consistently look for ways to enhance shareholder value by their diligence and hard work. Please join me in thanking them for their commitment. In addition to the Bank, which operates as a wholly owned subsidiary of the Company, we would like to remind you of our three subsidiary companies: page 3 REPORT OF AUDIT page 4 2015 | ANNUAL REPORT REPORT OF AUDIT page 5 CONSOLIDATED BALANCE SHEETS December 31, 2015 and 2014 (dollars in thousands) ASSETS Cash and due from banks, including reserve requirements of $14,587 at 12/31/15 and $12,569 at 12/31/14 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, $250,000 or more Other time Total deposits Securities sold under agreements 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; no shares issued and outstanding Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,510,538 shares at 12/31/15 and 5,612,588 shares at 12/31/14 Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity See Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 25, 2016, for a complete set of Consolidated Financial Statements. page 6 2015 2014 29,194 10,569 39,763 268,530 3,636 272,166 51,213 17,885 69,098 281,099 4,031 285,130 4,149 1,375 689,091 (9,589) 679,502 16,976 14,546 739 10,640 1,038,481 244,231 431,052 26,891 130,001 832,175 27,874 43,500 20,619 9,449 933,617 651,891 (11,082) 640,809 17,000 14,125 2,016 10,941 1,040,494 210,758 407,504 47,872 148,566 814,700 48,430 50,000 20,619 8,080 941,829 — — 46,171 53,183 5,510 104,864 1,038,481 48,088 45,124 5,453 98,665 1,040,494 $ $ $ $ 2015 | ANNUAL REPORT CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 2015, 2014 and 2013 (dollars in thousands, except per share amounts) 2015 2014 2013 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 (Reduction of) provision for loan losses Net interest income after provision for loan losses NON-INTEREST INCOME: Service charges Other service charges and fees Gain on sale of securities Mortgage banking income Insurance and brokerage commissions Gain/(loss) on sales and write-downs of other real estate Miscellaneous Total non-interest income NON-INTEREST EXPENSE: Salaries and employee benefits Occupancy Professional fees Advertising Debt card expense FDIC insurance Other Total non-interest expense Earnings before income taxes Income tax expense 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 $ $ $ $ $ See Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 25, 2016, for a complete set of Consolidated Financial Statements. 31,098 26 2,616 4,600 326 38,666 432 870 1,735 402 45 3,484 35,182 (17) 35,199 4,647 931 — 1,130 714 245 5,645 13,312 18,285 6,288 1,468 784 988 681 7,284 35,778 12,733 3,100 9,633 — 9,633 1.73 1.72 0.28 30,305 65 2,995 4,677 378 38,420 499 1,188 2,166 389 45 4,287 34,133 (699) 34,832 4,961 1,080 266 804 701 (622) 4,974 12,164 17,530 6,251 1,401 804 905 739 8,041 35,671 11,325 1,937 9,388 — 9,388 1.67 1.66 0.18 30,194 85 1,639 4,427 351 36,696 732 1,650 2,518 398 55 5,353 31,343 2,584 28,759 4,566 1,172 614 1,228 661 (581) 4,992 12,652 16,851 5,539 1,088 685 823 864 6,991 32,841 8,570 1,879 6,691 656 6,035 1.08 1.07 0.12 page 7 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. Peoples Bancorp Officers Lance A. Sellers President and Chief Executive Officer Peoples Bank Officers 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. Practitioner of Internal Medicine BL Price Medical Consultants, PLLC Larry E. Robinson President and Chief Executive Officer The Blue Ridge Distributing Company, Inc. W. Gregory Terry General Manager Drum and Willis-Reynolds Funeral Homes and Crematory Dan Ray Timmerman, Sr. Chairman of the Board and Chief Executive Officer Timmerman Manufacturing, Inc. Benjamin I. Zachary President, Treasurer, General Manager and Director, Alexander Railroad Company A. Joseph Lampron, Jr. Executive Vice President, Chief Financial Officer, Corporate Treasurer and Assistant Corporate Secretary William D. Cable, Sr. Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer Lance A. Sellers President and Chief Executive Officer A. Joseph Lampron, Jr. Executive Vice President, Chief Financial Officer William D. Cable, Sr. Executive Vice President, Chief Operating Officer Kimberly L. Boyd Senior Vice President, Chief Banking Support Officer Jeffrey P. Gniadek Senior Vice President, Area Executive Rafael Intriago Senior Vice President, Banco de la Gente Retail Director Walter C. Joyce Senior Vice President, Chief Technology Director James O. Perry Senior Vice President, Chief Retail Officer David E. Reitzel Senior Vice President, Real Estate Administration Daniel F. Richard Senior Vice President, Area Executive, Triangle Mark W. Sigmon Senior Vice President, Area Executive, Denver Timothy P. Turner Senior Vice President, Commercial Credit Angela J. Abernethy First Vice President, Treasury Management Manager Kimberly D. Bazzle First Vice President, Marketing Director J. LaShae Bock First Vice President, Human Resources Director page 8 David C. Brown First Vice President, Certified Financial Planner George S. Earp First Vice President, Finance Director Jan G. Griffin First Vice President, Loan Operations Director Leslie D. Hambrick First Vice President, Internal Auditor M. Beth LaBarbera First Vice President, Regional Sales Manager Connie P. Ollis First Vice President, Compliance/Security Officer Lucretia K. Rogers First Vice President, Regional Sales Manager Carol S. Shinn First Vice President, Deposit Operations Director Robert C. Sieg First Vice President, BSA Officer Kyle E. Sigmon First Vice President, Consumer Credit Jody G. Street First Vice President, Area Executive, Newton Ryan M. Waddle First Vice President, Business Development Officer, Mooresville Carol R. Allen Vice President, Business Center Manager, Maiden Suzanne l. Blackwell Vice President, Mortgage Sales Manager Velvet L. Burton Vice President, Service Center Manager Martha P. Connors Vice President, Banco de la Gente, Regional Sales Manager Wendy E. Cordero Vice President, Banco de la Gente Mortgage Manager Kay F. Deal Vice President, Business Center Manager, Conover Roger G. Decato Vice President, Business Development Officer, Newton Zachary M. Dellinger Vice President, Business Development Officer, Lincolnton James R. Durham Vice President, Financial Advisor Heather N. Edwards Vice President, Business Center Manager, Mooresville Barbara W. Erwin Vice President, Commercial Credit Tommie A. Hall Vice President, Loan Documentation Lamona J. Harbinson Vice President, Electronic Banking Manager Maria F. Hoyos Vice President, Banco de la Gente, Regional Sales Manager Paul B. Jones Vice President, Mortgage Underwriter David S. Lewis, Jr. Vice President, Business Development Officer, Viewmont Brenda K. Mash Vice President, Business Center Manager, Denver Bruce E. Meisner Vice President, REAS Manager Vickie E. Miller Vice President, Retail Support Coordinator Tammy L. Mitchell Vice President, Learning & Development Manager Wendy H. Moran Vice President, Business Development Officer, Cornelius John J. Noonan Vice President, CBRES Manager Paula M. Parker Vice President, Business Center Manager, Catawba Valley Blvd Wesley S. Pittman Vice President, Business Center Manager, Lincolnton/West Lincoln Lynn H. Poole Vice President, Business Center Manager, Catawba Krissy O. Price Vice President, Assistant Corporate Secretary Andrew R. Puntch Vice President, Application & Project Management Manager Jeanette R. Ringley Vice President, Business Center Manager, Newton Sandra B. Shufor d Vice President, Data Management Manager Shawn D. Sigmon Vice President, Mortgage Department Manager John W. Somers Vice President, Business Center Manager, Lincolnton Robert D. Spencer Vice President, Business Center Manager, Viewmont Dominick Vertorano Vice President, Business Center Manager, Cornelius Allison J. Taylor Vice President, Business Center Manager, Springs Road Lisa G. Treadaway Vice President, Organizational Architect Adam P. Turbyfill Vice President, Business Development Officer, Triangle 2015 | ANNUAL REPORT SUBSIDIARIES 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. Lance A. Sellers Officers David E. Reitzel - President Lance A. Sellers - Vice President John Noonan – Vice President Krissy O. Price - Secretary A. Joseph Lampron, Jr. – Treasurer Peoples Bank Subsidiaries’ Board of Directors and Officers Peoples Investment Services, Inc. Board of Directors Robert C. Abernethy Billy L. Price, Jr., M.D. David C. Brown Larry E. Robinson Douglas S. Howard Lance A. Sellers William D. Cable, Sr. Officers Lance A. Sellers - President David C. Brown - Vice President and Assistant Secretary Krissy O. Price - Secretary A. Joseph Lampron, Jr. – Treasurer Real Estate Advisory Services, Inc. Board of Directors Robert C. Abernethy Dan Ray Timmerman, Sr. David E. Reitzel Lance A. Sellers Officers David E. Reitzel – President Lance A. Sellers – Vice President Bruce Meisner – Vice President Krissy O. Price – 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 5, 2016, 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. 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. 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 Elliott Davis Decosimo, PLLC 700 East Morehead Street, Suite 400 Charlotte, NC 28202 page 9 CORE VALUES Employees We are valued so we add value. Integrity We are fair and truthful. Exceptional Customer Service We surpass our customers’ expectations. Accountability We are accountable for our own actions and each other. Progressive and Positive We see change as an opportunity. 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 Newton 420 West A Street Newton, NC 28658 (828) 464-5663 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 Abernethy Laurels Satellite Location 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 6350 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 3023-105 Capital Boulevard Raleigh, NC 27604 (919) 747-8000 Banco de la Gente Loan Production Office 2000 Avondale Drive Durham, NC 27704 (919) 747-8003 Banco de la Gente Loan Production Office 3015 Waughtown Street Winston-Salem, NC 27107 (336) 602-9704 Peoples Bancorp Center 518 West C Street PO Box 467 Newton, NC 28658 (828) 464-5620 Toll-free (800) 948-7195 Banco de la Gente Administrative Office 800 East Arrowood Road Charlotte, NC 28217 (704) 909-5460 Customer Service Center (828) 466-1765 Toll-free (877) 802-1212 TheRealPeoplesBank.com