PeoplesBancorp 2 0 1 7 A n n u a l R e p o r t 5662_PB_AnnualReport_2017.indd 1 3/8/18 1:41 PM Our Promise Our Core Values: We strive to be exceptional Employees and inspire others to be exceptional too. Our Vision To be the bank that’s exceptional at serving our communities, including employees, customers and shareholders. Our Mission To provide exceptional customer service while selling to customer needs. We are informed, encouraged,and committed. Integrity We are fair and truthful. Exceptional Customer Service We surpass our customers’ expectations. Accountability We are accountable for our own actions and bank goals. Progressive and Positive We see change as an opportunity. 5662_PB_AnnualReport_2017.indd 2 3/8/18 1:41 PM Table of Contents Message from the President Report of Independent Registered Public Accounting Firm Financial Highlights Consolidated Balance Sheets Consolidated Statements of Earnings Board of Directors and Officers Subsidiaries / Shareholder and General Information 2 4 5 6 7 8 9 5662_PB_AnnualReport_2017.indd 3 3/8/18 1:41 PM From the President “ Our Bank is an institution that honors people, serves with integrity, and supports community.” It is against the backdrop of our Bank’s continued commitment to being exceptional that I present the 2017 Annual Report of business activity on behalf of Peoples Bancorp of North Carolina, Inc. In its 105th consecutive year of being presented, this report is a reflection of the efforts of our employees, who demonstrate daily a determination to do the right thing by our customers and our communities through their enduring service to the Company. Year-to-date highlights are as follows: l Net earnings were a record $10.3 million or $1.71 basic net earnings per share and $1.69 diluted net earnings per share for the year ended December 31, 2017, as compared to $9.2 million or $1.53 basic net earnings per share and $1.50 diluted net earnings per share for the same period one year ago. l 2017 net earnings reflect the following non-recurring expenses: – $508,000 penalties on FHLB borrowing prepayments included in other non- interest expense – $588,000 charge to income tax expense due to the revaluation of deferred taxes as required due to the passing of the Tax Cuts and Jobs Act in December, 2017 l Total loans increased $36.0 million to $759.8 million at December 31, 2017, compared to $723.8 million at December 31, 2016. l Core deposits were $887.5 million or 97.9% of total deposits at December 31, 2017, compared to $865.4 million or 96.9% of total deposits at December 31, 2016. l As of December 31, 2017 shareholders’ equity was $116.0 million, or 10.6% of total assets, compared to $107.4 million, or 9.9% of total assets, as of December 31, 2016. This increase is primarily due to an increase in retained earnings due to net income. Our Bank is focused on making an impact on the lives of our communities, including employees, customers and shareholders. We want our employees to feel empowered and inspired to make a difference. They fill an invaluable role for our Bank. They connect with customers, listen to their challenges, understand their needs, and create solutions. We want to be that same support for them. We honor their commitment to our Bank and want to see them grow, realizing that their feedback and growth is vital to our continued success. We are always in search of attracting new employees, and seeking passionate people who want to share their talents and help our customers prosper. 5662_PB_AnnualReport_2017.indd 4 3/8/18 1:41 PM 2 2 0 1 7 A n n u a l R e p o r t Our customers look to our Bank to support them in life and in business. It’s a great privilege and honor to partner with them during some of their most significant life events. They trust us to look out for their best interest, and to guide them on their financial journey. When we’re exceptional at what we do, we can help them be exceptional at what they do. We want our customers to be grateful for our partnership, so that they tell others about us too. Our final community is our shareholders. We want our shareholders to understand that we’re focused on maintaining the highest operating standards, including being a well-capitalized bank with strong earnings. We have additional strengths that aren’t as easily measured. Our Bank is an institution that honors people, serves with integrity, and supports community. We sell to customers’ needs and give our best in all of our endeavors, staying true to the values upon which our Bank was founded. Our new brand launch last year was met with great enthusiasm and support. It helped us tell the story of our Bank, the how and why we serve, as well as emphasize our strength and stability. Our community is listening and gaining a better understanding of all that we have to offer. We’re continuing to educate, introducing new products and reaching more people where they are. It’s inspiring to be a part of Peoples Bank, the bank that is striving to be exceptional every day. The Directors of Peoples Bancorp play a direct and critical role in the success of our Company. They consistently endeavor to enhance shareholder value through their diligence, hard work and acumen. 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: Peoples Investment Services, Inc., licensed financial advisors who provide access to investment products, which include stocks, bonds, mutual funds, annuities, and other suitable monetary investments through our affiliation with Raymond James Financial Services, Inc. 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, assists community banks across the country with appraisal management services. The Annual Shareholders Meeting is scheduled for May 3, 2018 at Catawba Country Club beginning at 11 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 members of their communities. Sincerely, Lance A. Sellers President and Chief Executive Officer 5662_PB_AnnualReport_2017.indd 5 3/8/18 1:41 PM 3 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Peoples Bancorp of North Carolina, Inc.: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 (not presented herein); and in our report, dated Mach 15, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Charlotte, North Carolina March 15, 2018 Elliott Davis Decosimo PLLC | www.elliottdavis.com 4 5662_PB_AnnualReport_2017.indd 6 3/8/18 1:41 PM Elliott Davis PLLC | www.elliottdavis.com Financial Highlights 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 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 $ $ $ $ 2 017 41,949 2,377 39,572 (507) 40,079 12,838 38,702 3,947 10,268 1.71 1.69 0.44 30.69 19.34 753,398 229,321 1,092,166 906,952 115,975 0.93% 8.78% 25.67% 10.64% 2 0 1 7 A n n u a l R e p o r t Change 5% -27% 8% -58% 6% -8% -3% 54% 12% 12% 13% 26% 35% 7% 5% -8% 0% 2% 8% 2016 39,809 3,271 36,538 (1,206) 37,744 13,976 39,982 2,561 9,177 1.53 1.50 0.35 22.79 18.03 716,261 249,946 1,087,991 892,918 107,428 0.85% 8.11% 22.95% 10.51% * Shares outstanding and per share computations have been restated to reflect a 10% stock dividend paid during the fourth quarter of 2017. Elliott Davis Decosimo PLLC | www.elliottdavis.com 5662_PB_AnnualReport_2017.indd 7 3/8/18 1:41 PM 5 Consolidated Balance Sheets For the years ended December 31, 2017 and 2016 (Dollars in thousands) Assets Cash and due from banks, including reserve requirements of $7,472 at 12/31/17 and $6,075 at 12/31/16 $ 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: Noninterest-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 (Note 10) Shareholders’ equity: December 31, December 31, 2017 53,186 4,118 57,304 229,321 1,830 231,151 857 759,764 (6,366) 753,398 19,911 15,552 118 13,875 2 016 53,613 16,481 70,094 249,946 2,635 252,581 5,709 723,811 (7,550) 716,261 16,452 14,952 283 11,659 $ 1,092,166 1,087,991 $ 285,406 498,445 18,756 104,345 906,952 37,757 - 20,619 10,863 976,191 271,851 477,054 26,771 117,242 892,918 36,434 20,000 20,619 10,592 980,563 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 5,995,256 shares at December 31, 2017 and 5,417,800 shares at December 31, 2016 Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity - - 62,096 50,286 3,593 115,975 $ 1,092,166 44,187 60,254 2,987 107,428 1,087,991 See Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 23, 2018, for a complete set of Consolidated Financial Statements. 5662_PB_AnnualReport_2017.indd 8 3/8/18 1:41 PM 6 Consolidated Statements of Earnings For the Years Ended December 31, 2017, 2016 and 2015 2 0 1 7 A n n u a l R e p o r t (Dollars in thousands, except per share amounts) 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 Debit card expense FDIC insurance Other Total non-interest expense Earnings before income taxes Income tax expense Net earnings Basic net earnings per share Diluted net earnings per share Cash dividends declared per share 2017 34,888 219 2,404 4,236 202 41,949 598 466 662 590 61 2,377 39,572 (507) 40,079 4,453 593 - 1,190 761 (239) 6,080 12,838 20,058 6,701 1,236 1,195 1,248 347 7,917 38,702 14,215 3,947 10,268 1.71 1.69 0.44 $ $ $ $ $ 2016 32,452 123 2,531 4,454 249 39,809 495 586 1,661 485 44 3,271 36,538 (1,206) 37,744 4,497 890 729 1,428 632 64 5,736 13,976 19,264 6,765 2,439 1,136 1,141 494 8,743 39,982 11,738 2,561 9,177 1.53 1.50 0.35 2 015 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 1.57 1.56 0.25 See Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated March 23, 2018, for a complete set of Consolidated Financial Statements. 7 5662_PB_AnnualReport_2017.indd 9 3/8/18 1:41 PM 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. Practitioner of Internal Medicine BL Price Jr Medical Consultants, PLLC Larry E. Robinson Chairman of the Board and Chief Executive Officer The Blue Ridge Distributing Company, Inc. W. Gregory Terry President DFH Holdings Operator/General Manager Drum & Willis-Reynolds Funeral Home & 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 Corporate Officers Lance A. Sellers President and Chief Executive Officer (CEO) William D. Cable, Sr. Executive Vice President, Chief Operating Officer (COO) A. Joseph Lampron, Jr. Executive Vice President, Chief Financial Officer (CFO) Lucretia K. Rogers First Vice President, Regional Sales Manager Carol S. Shinn First Vice President, Director of Deposit Operations Kyle E. Sigmon First Vice President, Consumer Credit Administration Ryan M. Waddle First Vice President, Area Executive - Mooresville Margaret C. Ward First Vice President Human Resources Director Vice Presidents Sandy R. Abernathy Vice President, Business Center Manager - Claremont Melissa R. Aldrich Vice President, Business Center Manager - Hiddenite Carol R. Allen Vice President, Business Center Manager – Maiden Steven D. Brown Vice President, Business Center Manager - Conover Velvet L. Burton Vice President, Service Center Manager Jeanine L. Cohoon Vice President, Marketing Channel Analyst Wendy E. Cordero-Jones Vice President, Banco Mortgage Lending Manager Roger G. Decato Vice President, Business Development Officer Zachary M. Dellinger Vice President, Business Development Officer Cathleen H. Dillingham Vice President, Learning & Development Associate James R. Durham Vice President, Financial Advisor Heather N. Edwards Vice President, Business Center Manager – Mooresville Rhonda L. Fleming Vice President, Business Development Officer Maria P. Gibbs Vice President, Business Development Officer Lauren K. Hammond Vice President, Marketing Specialist Lamona J. Harbinson Vice President, E-Services Management Manager Vanessa Horvath Vice President, Business Development Officer David S. Lewis Jr. Vice President, Senior Lending Officer Ryan T Link Vice President, Senior Credit Analyst George “Marty” Lowder Vice President, Financial Analyst Brenda K. Mash Vice President, Business Center Manager – Denver Joshua E. McKinney Vice President, Business Development Officer – Hickory Bruce E. Meisner Vice President, REAS Manager Vickie E. Miller Vice President, Retail Support Coordinator Paula M. Parker Vice President, Business Center Manager – CVB Lynn H. Poole Vice President, Business Center Manager – Catawba Kristina O. Price Vice President, Assistant Corporate Secretary Andrew R. Puntch Vice President, Application & Project Management Manager Jeanette E. Ringley Vice President, Business Center Manager - Newton C. Randy Rogers Vice President, Financial Advisor Sandra B. Shuford Vice President, Data Management & Computer Ops Manager Shawn D. Sigmon Vice President, Mortgage Loan Origination System Analyst John W. Somers Vice President, Business Center Manager – Lincolnton Jon Bradley Southers Vice President, Commercial Credit Administrator Robert D. Spencer Vice President, Business Center Manager – Viewmont 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 Jennifer K. Turner Vice President, Credit Admin Loan Review Officer Dominick Vertorano II Vice President, Business Center Manager - Cornelius Joleen M. Wallace Vice President, Mortgage Underwriter Tandra D Wilkinson Vice President, Loan Balancing & Service Manager Senior Vice Presidents Kimberly L. Boyd Senior Vice President, Chief Banking Support Officer Jeffery P. Gniadek Senior Vice President, Area Executive – Hickory Rafael Intriago Senior Vice President, Metro Market Executive Walter C. Joyce Senior Vice President, Chief Technology Officer 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 Jody G. Street Senior Vice President Area Executive - Newton Timothy P. Turner Senior Vice President, Chief Credit Officer First Vice Presidents Angela J. Abernethy First Vice President, Compliance Quality Analyst Heather A. Allen First Vice President, BSA Officer Kimberly D. Bazzle First Vice President, Marketing Director David C. Brown First Vice President, Certified Financial Planner Martha P. Connors First Vice President Sales Relationship Manager - Metro Region George S. Earp First Vice President, Finance Director Jan G. Griffin First Vice President, Director of Loan Operations Leslie D. Hambrick First Vice President, Chief Internal Auditor Maria Fernanda Hoyos First Vice President Sales Relationship Manager - Raleigh Region M. Beth LaBarbera First Vice President, Regional Sales Manager John J. Noonan First Vice President CBRES Appraisal/Compliance Manager Connie P. Ollis First Vice President, Compliance/Security Manager 8 5662_PB_AnnualReport_2017.indd 10 3/8/18 1:41 PM Peoples Bank Subsidiaries’ Board of Directors and Officers Shareholder and General Information 2 0 1 7 A n n u a l R e p o r t Community Bank Real Estate Solutions, LLC Board of Directors Officers Officers Robert C. Abernethy David E. Reitzel Dan Ray Timmerman, Sr. Lance A. Sellers David E. Reitzel President Lance A. Sellers Vice President John Noonan Vice President Krissy O. Price Secretary A. Joseph Lampron, Jr. Treasurer Peoples Investment Services, Inc. Board of Directors Officers 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. 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 Officers Robert C. Abernethy Dan Ray Timmerman, Sr. David E. Reitzel Lance A. Sellers David E. Reitzel President Lance A. Sellers Vice President Bruce Meisner Vice President Krissy O. Price Secretary A. Joseph Lampron, Jr. Treasurer Annual Meeting The Annual Meeting of Shareholders of Peoples Bancorp will be held at 11 a.m. on May 3, 2018 at Catawba Country Club located at 1154 Country Club Rd, 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, PLLC 500 East Morehead Street, Suite 700 Charlotte, NC 28202 5662_PB_AnnualReport_2017.indd 11 3/8/18 1:41 PM 9 PeoplesBankNC.com 5662_PB_AnnualReport_2017.indd 12 3/8/18 1:41 PM