UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549FORM
      10-KANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D)OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended:    December 31,
      2008Peoples 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)Securities
      Registered Pursuant to Section 12(b) of the Act:NoneSecurities
      Registered Pursuant to Section 12(g) of the Act:Common Stock, no par
      value(title
      of class)Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.Yes
            o
            No
            xIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the ActYes
            o
            No
            xIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.Yes
            x
            No
            oIndicate
      by check mark if disclosure of delinquent filers in response to Item 405
      of Regulation S-K is not contained herein, and will not be contained, to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference inPart
      III of this Form 10-K or any amendment to this Form
      10-K.       xIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting
      company.




Large Accelerated
      Filer
            o
            
            Accelerated
      Filer
            o
            
            Non-Accelerated
      Filer
            o
            
            Smaller Reporting
      Company
            x




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).Yes
              o
              No
              xState
      the aggregate market value of the voting and non-voting common equity held
      by non-affiliates computed by reference to the price at which the common
      equity was last sold, or the average bid and asked prices of such common
      equity, as of the last business day of the registrant’s most recently
      completed second fiscal quarter.  $48,085,617 based on the
      closing price of such common stock on June 30, 2008, which was $10.89 per
      share.Indicate
      the number of shares outstanding of each of the registrant's classes of
      common stock, as of the latest practicable date.
                5,539,056 shares of
      common stock, outstanding at February 28,
  2009.













DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the year
ended December 31, 2008 (the “Annual Report”), which will be included as
Appendix A to the Proxy Statement for the 2009 Annual Meeting of Shareholders,
are incorporated by reference into Part I and Part II and included as Exhibit 13
to the Form 10-K.
 
 Portions
of the Proxy Statement for the 2009 Annual Meeting of Shareholders of Peoples
Bancorp of North Carolina, Inc. to be held on May 7, 2009 (the “Proxy
Statement”), are incorporated by reference into Part III.
        
 
 
 
 
 
 
 
 This
report contains certain forward-looking statements with respect to the financial
condition, results of operations
and business of Peoples Bancorp of North Carolina, Inc. (the
“Company”).  These forward-looking statements involve risks and
uncertainties and are based on the beliefs and assumptions of management of the
Company and on the information available to management at the time that these
disclosures were 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 (the “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.  The Company undertakes no obligation to update any
forward-looking statements.


2








PEOPLES BANCORP OF
      NORTH CAROLINA, INC.FORM 10-K CROSS
      REFERENCE INDEXNotice of
    2009Annual Meeting,2008 Form
            
            Proxy
      Statement10-K
            
            and Annual
      ReportPage
            
            PagePART
      IItem 1 -
      Business
            
            4 -
    11
            
            N/AItem 1A - Risk
      Factors
            
            11 - 15
            
            N/AItem 1B - Unresolved
      Staff Comments
            
            15
            
            N/AItem 2 -
      Properties
            
            16
            
            N/AItem 3 - Legal
      Proceedings
            
            16
            
            N/AItem 4 - Submission
      of Matters to a Vote of Security Holders
            
            16
            
            N/APART
      IIItem 5 - Market for
      the Common Equity, Related Shareholder Matters andIssuer Purchases of
      Equity Securities
            
            17 - 18
            
            A-28Item 6 - Selected
      Financial Data
            
            18
            
            A-3Item 7 -
      Management's Discussion and Analysis of Financial Condition andResults of
      Operations
            
            18
            
            A-4  - 
      A-29Item 7A -
      Quantitative and Qualitative Disclosures About Market Risk
            
            18
            
            A-26Item 8 - Financial
      Statements and Supplementary Data
            
            18
            
            A-30  - 
      A-61Item 9 - Changes in
      and Disagreements with Accountants on Accountingand Financial
      Disclosure
            
            18
            
            N/AItem 9A - Controls
      and Procedures
            
            19
            
            N/AItem 9B - Other
      Information
            
            19
            
            N/APART
      IIIItem 10 - Directors
      and Executive Officers of the Registrant
            
            20
            
            A-62Item 11 - Executive
      Compensation
            
            20
            
            11 - 27Item 12 - Security
      Ownership of Certain Beneficial Owners and Management
            
            20
            
            4 - 7Item 13 - Certain
      Relationships and Related Transactions
            
            20
            
            28Item 14 - Principal
      Accountant Fees and Services
            
            20
            
            35PART
      IVItem 15 - Exhibits
      and Financial Statement Schedules
            
            21  - 
      24
            
            N/ASignatures
            
            25
            
            N/A






3




PART
I
  ITEM
1.   BUSINESS
 
 General
 
 Peoples
Bancorp of North Carolina, Inc. (the “Company”), was formed in 1999 to serve as
the holding company for Peoples Bank (the “Bank”).  The Company is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of
1956, as amended (the “BHCA”).  The Company’s principal source of
income is any dividends, which are declared and paid by the Bank on its capital
stock.  The Company has no operations and conducts no business of its
own other than owning the Bank.  Accordingly, the discussion of the
business which follows concerns the business conducted by the Bank, unless
otherwise indicated.
 
 The Bank,
founded in 1912, is a state-chartered commercial bank serving the citizens and
business interests of the Catawba Valley and surrounding communities through 21
banking offices located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden,
Claremont, Hiddenite, Hickory, Charlotte, Monroe, Cornelius, Mooresville and
Raleigh North Carolina.  The Bank also operates a loan production
office in Denver, North Carolina.  At December 31, 2008, the Company
had total assets of $968.8 million, net loans of $770.2 million, deposits of
$721.1 million, total securities of $131.2 million, and shareholders’ equity of
$101.1 million.
 
 The Bank
has a diversified loan portfolio, with no foreign loans and few agricultural
loans.  Real estate loans are predominately variable rate commercial
property loans, which include residential development loans to commercial
customers.  Commercial loans are spread throughout a variety of
industries with no one particular industry or group of related industries
accounting for a significant portion of the commercial loan
portfolio.  The majority of the Bank's deposit and loan customers are
individuals and small to medium-sized businesses located in the Bank's market
area.  The Bank’s loan portfolio also includes Individual Taxpayer
Identification Number (ITIN) mortgage loans generated thorough the Bank’s Banco
de le Gente offices.  Additional discussion of the Bank’s loan
portfolio and sources of funds for loans can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” on
pages A-4 through A-29 of the Annual Report, which is included in this Form 10-K
as Exhibit 13.
 
 The
operations of the Bank and depository institutions in general are significantly
influenced by general economic conditions and by related monetary and fiscal
policies of depository institution regulatory agencies, including the Federal
Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North
Carolina Commissioner of Banks (the "Commissioner").
 
 At
December 31, 2008, the Bank employed 270 full-time equivalent
employees.
 
 Subsidiaries
 
 The Bank
is a subsidiary of the Company.  The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Real Estate Advisory Services, Inc. Through a relationship
with Raymond James Financial Services, Inc., Peoples Investment Services, Inc.
provides the Bank's customers access to investment counseling and non-deposit
investment products such as stocks, bonds, mutual funds, tax deferred annuities,
and related brokerage services.  Real Estate Advisory Services, Inc.
provides real estate appraisal and real estate brokerage services.
 
 In June
2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital
Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred
beneficial interests in the Company’s junior subordinated deferrable interest
debentures.  All of the common securities of PEBK Trust II are owned
by the Company.  The proceeds from the issuance of the common
securities and the trust preferred securities were used by PEBK Trust II to
purchase $20.6 million of junior subordinated debentures of the Company, which
pay a floating rate equal to three month LIBOR plus 163 basis
points.  The proceeds received by the Company from the sale of the
junior subordinated debentures were used in December 2006 to repay the trust
preferred securities issued by PEBK Trust in December 2001 and for general
purposes.  The debentures represent the sole asset of PEBK Trust
II.  PEBK Trust II is not included in the consolidated financial
statements.
  4
 
 The trust
preferred securities issued by PEBK Trust II accrue and pay quarterly at a
floating rate of three-month LIBOR plus 163 basis points.  The Company
has guaranteed distributions and other payments due on the trust preferred
securities to the extent PEBK Trust II does not have funds with which to make
the distributions and other payments.  The net combined effect of the
trust preferred securities transaction is that the Company is obligated to make
the distributions and other payments required on the trust preferred
securities.
 
 These
trust preferred securities are mandatorily redeemable upon maturity of the
debentures on June 28, 2036, or upon earlier redemption as provided in the
indenture.  The Company has the right to redeem the debentures
purchased by PEBK Trust II, in whole or in part, on or after June 28,
2011.  As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be the principal amount and any
accrued but unpaid interest.
 
 Market
Area
 
 The
Bank's primary market consists of the communities in an approximately 50-mile
radius around its headquarters office in Newton, North Carolina.  This
area includes Catawba County, Alexander County, Lincoln County, Iredell County
and portions of northeast Gaston County.  The Bank is located only 40
miles north of Charlotte, North Carolina and the Bank's primary market area is
and will continue to be significantly affected by its close proximity to this
major metropolitan area.  The Bank has two offices in Mecklenburg
County, one office in Union County and one office in Wake County specifically
designed to serve the growing Latino market.
 
 Employment
in the Bank's primary market area is diversified among manufacturing, retail and
wholesale trade, technology, services and utilities.  Catawba County’s
largest employers include Catawba County Schools, Frye Regional Medical Center,
CommScope, Inc. (manufacturer of fiber optic cable and accessories), Merchant
Distributors, Inc (wholesale food distributor), Hickory Springs (manufacturer of
foam rubber cushions), Catawba Valley Medical Center, Catawba County, Sherrill
Furniture Company, CV Industries (furniture manufacturer), McCreary Modern
(furniture manufacturer) and Garbage Disposal Service (garbage disposal and
recycling)
 
 Competition
 
 The Bank
has operated in the Catawba Valley region for more than 95 years and is the only
financial institution headquartered in Newton.  Nevertheless, the Bank
faces strong competition both in attracting deposits and making loans. Its most
direct competition for deposits has historically come from other commercial
banks, credit unions and brokerage firms located in its primary market area,
including large financial institutions.  One national money center
commercial bank is headquartered in Charlotte, North Carolina.  Based
upon June 30, 2008 comparative data, the Bank had 21.88% of the deposits in
Catawba County, placing it second in deposit size among a total of 13 banks with
branch offices in Catawba County; 9.90% of the deposits in Lincoln County,
placing it sixth in deposit size among a total of nine banks with branch offices
in Lincoln County and 13.01% of the deposits in Alexander County, placing it
fifth in deposit size among a total of seven banks with branch offices in
Alexander County.
 
 The Bank
also faces additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities.  The Bank's deposit base has grown principally due to
economic growth in the Bank's market area coupled with the implementation of new
and competitive deposit products. The ability of the Bank to attract and retain
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment
opportunities.
 
 The Bank
experiences strong competition for loans from commercial banks and mortgage
banking companies.  The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers.  Competition is increasing as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions.
 
 Supervision
and Regulation
 
 Bank
holding companies and commercial banks are extensively regulated under both
federal and state law.  The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company, the
Bank and any subsidiaries.  This summary is qualified in its entirety
by reference to the particular statute and regulatory provisions cited below and
is not intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank.  Supervision,
regulation and examination of the Company and the Bank by the regulatory
agencies are intended primarily for the protection of depositors rather than
shareholders of the Company.
  5
 
  Statutes
and regulations which contain wide-ranging proposals for altering the
structures, regulations and competitive relationship of financial institutions
are introduced regularly.  The Company cannot predict whether or in
what form any proposed statute or regulation will be adopted or the extent to
which the business of the Company and the Bank may be affected by such statute
or regulation.
 
 General.  There are a
number of obligations and restrictions imposed on bank holding companies and
their depository institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such depository
institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default.  For example,
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become “undercapitalized” with the
terms of the capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the bank's total assets at the time the bank became undercapitalized or (ii)
the amount which is necessary (or would have been necessary) to bring the bank
into compliance with all acceptable capital standards as of the time the bank
fails to comply with such capital restoration plan.  The Company, as a
registered bank holding company, is subject to the regulation of the Federal
Reserve.  Under a policy of the Federal Reserve with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy.  The Federal Reserve under the BHCA also
has the authority to require a bank holding company to terminate any activity or
to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of
any bank subsidiary of the bank holding company.
 
 In
addition, insured depository institutions under common control are required to
reimburse the FDIC for any loss suffered by its deposit insurance funds as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default.  The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the deposit insurance funds.  The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
 
 As a
result of the Company's ownership of the Bank, the Company is also registered
under the bank holding company laws of North Carolina.  Accordingly,
the Company is also subject to regulation and supervision by the
Commissioner.
 
 Capital Adequacy
Guidelines for Holding Companies.  The Federal
Reserve has adopted capital adequacy guidelines for bank holding companies and
banks that are members of the Federal Reserve System and have consolidated
assets of $150 million or more.  Bank holding companies subject to the
Federal Reserve’s capital adequacy guidelines are required to comply with the
Federal Reserve's risk-based capital guidelines. Under these regulations, the
minimum ratio of total capital to risk-weighted assets is 8%.  At
least half of the total capital is required to be “Tier I capital,” principally
consisting of common stockholders' equity, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
certain goodwill items.  The remainder (“Tier II capital”) may consist
of a limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, perpetual preferred stock, and a limited amount of the
general loan loss allowance.  In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage)
ratio, under which a bank holding company must maintain a minimum level of Tier
I capital to average total consolidated assets of at least 3% in the case of a
bank holding company which has the highest regulatory examination rating and is
not contemplating significant growth or expansion.  All other bank
holding companies are expected to maintain a Tier I capital (leverage) ratio of
at least 1% to 2% above the stated minimum.
 
 Capital
Requirements for the Bank.  The Bank, as a North Carolina
commercial bank, is required to maintain a surplus account equal to 50% or more
of its paid-in capital stock.  As a North Carolina chartered,
FDIC-insured commercial bank which is not a member of the Federal Reserve
System, the Bank is also subject to capital requirements imposed by the
FDIC.  Under the FDIC's regulations, state nonmember banks that (a)
receive the highest rating during the examination process and (b) are not
anticipating or experiencing any significant growth, are required to maintain a
minimum leverage ratio of 3% of total consolidated assets; all other banks are
required to maintain a minimum ratio of 1% or 2% above the stated minimum, with
a minimum leverage ratio of not less than 4%.  The Bank exceeded all
applicable capital requirements as of December 31, 2008.  At December
31, 2008, the Company’s Tier I risk-based capital and total risk-based capital
were 13.65% and 14.90%, respectively.
  6
  Dividend and
Repurchase Limitations.  The Company must
obtain Federal Reserve approval prior to repurchasing its Common Stock in excess
of 10% of its net worth during any twelve-month period unless the Company (i)
both before and after the redemption satisfies capital requirements for "well
capitalized" state member banks; (ii) received a one or two rating in its last
examination; and (iii) is not the subject of any unresolved supervisory
issues.  Due to the Company's participation in the Capital Purchase
Program ("CPP"), United States Treasury ("UST") approval is required for
the Company to repurchase shares of outstanding common stock.
 
 Although the payment of dividends and
repurchase of stock by the Company are subject to certain requirements and
limitations of North Carolina corporate law, except as set forth in this
paragraph, neither the Commissioner nor the FDIC have promulgated any
regulations specifically limiting the right of the Company to pay dividends and
repurchase shares.  However, the ability of the Company to pay
dividends or repurchase shares may be dependent upon the Company's receipt of
dividends from the Bank.
 
 North
Carolina commercial banks, such as the Bank, are subject to legal limitations on
the amounts of dividends they are permitted to pay.  Dividends may be
paid by the Bank from undivided profits, which are determined by deducting and
charging certain items against actual profits, including any contributions to
surplus required by North Carolina law.  Also, an insured depository
institution, such as the Bank, is prohibited from making capital distributions,
including the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is defined in the
applicable law and regulations).
 
 Under the
terms of the CPP, the UST has a preferential right to the payment of cumulative
dividends on the CPP Series A preferred stock.  No dividends are
permitted to be paid to common shareholders unless all accrued and unpaid
dividends for all past dividend periods on the CPP preferred stock were fully
paid. Any increase in dividends to common shareholders above the amount last
declared prior to October 14, 2008 ($0.12 per share quarterly in the case of the
Company) is subject to the consent of the UST for the first three years of the
CPP preferred stock investment.
 
 Deposit
Insurance.  The Bank’s
deposits are insured up to applicable limits by the Deposit Insurance Fund, or
DIF, of the FDIC. The DIF is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006. The Bank’s
deposits, therefore, are subject to FDIC deposit insurance
assessment.
 
 The FDIC
amended its risk-based deposit assessment system in 2007 to implement authority
granted by the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”).
Under the revised system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and
certain other factors. An institution’s assessment rate depends upon the
category to which it is assigned. Risk Category I, which contains the least
risky depository institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains further risk
differentiation based on the FDIC’s analysis of financial ratios, examination
component ratings and other information. Assessment rates are determined by the
FDIC and currently range from five to seven basis points for the healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for the
riskiest (Risk Category IV). The Bank was assessed at an average rate of 6.09
basis points in 2008.  The FDIC may adjust rates uniformly from one
quarter to the next, except that no single adjustment can exceed three basis
points.
  The FDIC
is authorized to set the reserve ratio for the DIF annually at between 1.15% and
1.5% of estimated insured deposits, in contrast to the statutorily fixed ratio
of 1.25% under the old system. The ratio, which is viewed by the FDIC as the
level that the funds should achieve, was established by the agency at 1.25% for
2007. The Reform Act also provided for the possibility that the FDIC may pay
dividends to insured institutions once the DIF reserve ratio equals or exceeds
1.35% of estimated insured deposits. The Reform Act also provided for a one-time
credit for eligible institutions based on their assessment base as of December
1996. Subject to certain limitations with respect to institutions that are
exhibiting weaknesses, credits can be used to offset future assessments until
exhausted.
 
 The FDIC
has issued rules increasing the assessment rates banks pay for deposit insurance
in order to restore the deposit insurance fund. The final rules uniformly raised
rates for the first quarter of 2009 by 7 basis points, on an annual basis, for
all banks. The FDIC also issued proposed rules where future rates would be based
on an institution’s risk, with riskier institutions bearing a greater share of
the proposed increase. Final rules on the risk-based premium assessment are
expected in the first quarter of 2009.
  FDIC Temporary
Liquidity Guarantee Program.On October 14, 2008, the
FDIC announced its Temporary Liquidity Guarantee Program (“TLGP”), which is
comprised of the Debt Guarantee Program (“DGP”) and the Transaction Account
Guarantee Program (“TAGP”).
  7
  The TAGP
provides unlimited deposit insurance coverage through December 31, 2009,
for non-interest bearing transaction accounts and certain interest-bearing
accounts (negotiable order of withdrawal (NOW) accounts with interest rates of
0.50% or less and lawyers trust accounts) at FDIC-insured depository
institutions.  Depository institutions participating in the TAGP will
be assessed, on a quarterly basis, an annualized 10 basis points fee on the
balance of each covered account in excess of the existing FDIC deposit insurance
limit of $250,000 that was established on a temporary basis, through December
31, 2009, by the Emergency Economic Stabilization Act of 2008.
  The DGP
provides an FDIC guarantee of certain senior unsecured debt of FDIC-insured
institutions and their holding companies.  The unsecured debt must be
issued on or after October 14, 2008 and not later than October 31,
2009, and the guarantee is effective through the earlier of the maturity date or
June 30, 2012.  The DGP coverage limit is generally 125% of the
eligible entity’s eligible debt outstanding on September 30, 2008 and
scheduled to mature on or before June 30, 2009 or, for certain insured
institutions, 2% of their liabilities as of September 30,
2008.  The proceeds of debt guaranteed under the DGP may not be used
to prepay debt that is not guaranteed by the FDIC.  Depending on the
term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis
points (annualized) for covered debt outstanding until the earlier of maturity
or June 30, 2012.
  The TAGP
and DGP are in effect for all eligible entities, unless the entity opted out on
or before December 5, 2008. The Company is participating in the TAGP and is
eligible to participate in the DGP although the Company has not chosen to issue
any debt under the program at this time.
 
 Federal Home Loan
Bank System.  The FHLB system
provides a central credit facility for member institutions. As a member of the
FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of
Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s
total assets at the end of each calendar year, plus 4.5% of its outstanding
advances (borrowings) from the FHLB of Atlanta under the new activity-based
stock ownership requirement.  On December 31, 2008, the Bank was in
compliance with this requirement.
 
 Community
Reinvestment. Under the Community
Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured
institution has a continuing and affirmative obligation consistent with its safe
and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions, nor does
it limit an institution’s discretion to develop, consistent with the CRA, the
types of products and services that it believes are best suited to its
particular community. The CRA requires the federal banking regulators, in
connection with their examinations of insured institutions, to assess the
institutions’ records of meeting the credit needs of their communities, using
the ratings of  “outstanding,” “satisfactory,” “needs to improve,” or
“substantial noncompliance,” and to take that record into account in its
evaluation of certain applications by those institutions. All institutions are
required to make public disclosure of their CRA performance ratings. The Bank
received an “outstanding” rating in its last CRA examination, which was
conducted during March 2007.
 
 Prompt Corrective
Action.The
FDIC has broad powers to take corrective action to resolve the problems of
insured depository institutions.  The extent of these powers will
depend upon whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
or "critically undercapitalized."  Under the regulations, an
institution is considered: (A) "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure; (B) "adequately capitalized" if it has
(i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or
3% or greater in the case of an institution with the highest examination
rating); (C)"undercapitalized" if it has (i) a total risk-based capital ratio of
less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a
leverage ratio of less than 4% (or 3% in the case of an institution with the
highest examination rating); (D) "significantly undercapitalized" if it has (i)
a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based
capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (E)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
 
 Changes in
Control.  The BHCA prohibits the Company from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve.  Similarly, Federal
Reserve approval (or, in certain cases, non-disapproval) must be obtained prior
to any person acquiring control of the Company.  Control is
conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the Company or controls in any manner
the election of a majority of the directors of the Company.  Control
is presumed to exist if a person acquires more than 10% of any class of voting
stock
  8
 
  and the
stock is registered under Section 12 of the Securities Exchange Act of 1934 or
the acquiror will be the largest shareholder after the
acquisition.
 
 Federal
Securities Law.  The Company has
registered its Common Stock with the SEC pursuant to Section 12(g) of the
Securities Exchange Act of 1934.  As a result of such registration,
the proxy and tender offer rules, insider trading reporting requirements, annual
and periodic reporting and other requirements of the Exchange Act are applicable
to the Company.
 
 Transactions with
Affiliates.Under current federal
law, depository institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act with respect to loans to directors,
executive officers and principal shareholders.  Under Section 22(h),
loans to directors, executive officers and shareholders who own more than 10% of
a depository institution (18% in the case of institutions located in an area
with less than 30,000 in population), and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the institution's loans-to-one-borrower limit
(as discussed below).  Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers and shareholders who own more than 10% of an institution, and
their respective affiliates, unless such loans are approved in advance by a
majority of the board of directors of the institution.  Any
"interested" director may not participate in the voting.  The FDIC has
prescribed the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval is required, as being
the greater of $25,000 or 5% of capital and surplus (up to
$500,000).  Further, pursuant to Section 22(h), the Federal Reserve
requires that loans to directors, executive officers, and principal shareholders
be made on terms substantially the same as offered in comparable transactions
with non-executive employees of the Bank.  The FDIC has imposed
additional limits on the amount a bank can loan to an executive
officer.
 
 Loans to One
Borrower.The Bank is subject to
the Commissioner's loans to one borrower limits which are substantially the same
as those applicable to national banks.  Under these limits, no loans
and extensions of credit to any borrower outstanding at one time and not fully
secured by readily marketable collateral shall exceed 15% of the unimpaired
capital and unimpaired surplus of the bank.  Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10% of unimpaired capital and unimpaired surplus.
 
 Gramm-Leach-Bliley
Act.  The federal Gramm-Leach-Bliley Act (the “GLB Act”)
dramatically changed various federal laws governing the banking, securities and
insurance industries.  The GLB Act has expanded opportunities for
banks and bank holding companies to provide services and engage in other
revenue-generating activities that previously were prohibited to
them.  However, this expanded authority also may present us with new
challenges as our larger competitors are able to expand their services and
products into areas that are not feasible for smaller, community oriented
financial institutions.  The GLB Act likely will have a significant
economic impact on the banking industry and on competitive conditions in the
financial services industry generally.
 
 USA Patriot Act
of 2001.In 2001, Congress
enacted the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (the “Patriot
Act”).  The Patriot Act is intended to strengthen the ability of U.S.
law enforcement and the intelligence community to work cohesively to combat
terrorism on a variety of fronts.  The potential impact of the Patriot
Act on financial institutions of all kinds is significant and wide
ranging.  The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and contains various regulations, including
standards for verifying customer identification at account opening, and rules to
promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.
 
 Sarbanes-Oxley
Act of 2002.The
Sarbanes-Oxley Act of 2002 is sweeping federal legislation addressing
accounting, corporate governance and disclosure issues. The impact of the
Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and
imposes significant new requirements for public company governance and
disclosure requirements.  Some of the provisions of the Sarbanes-Oxley
Act became effective immediately while others are still being
implemented.
 
 In
general, the Sarbanes-Oxley Act mandates important new corporate governance and
financial reporting requirements intended to enhance the accuracy and
transparency of public companies’ reported financial results.  It
establishes new responsibilities for corporate chief executive officers, chief
financial officers and audit committees in the financial reporting process and
creates a new regulatory body to oversee auditors of public
companies.  It backs these requirements with new SEC enforcement
tools, increases criminal penalties for federal mail, wire and securities fraud,
and creates new criminal penalties for document and record destruction in
connection with federal investigations.  It also
  9
 
  increases
the opportunity for more private litigation by lengthening the statute of
limitations for securities fraud claims and providing new federal corporate
whistleblower protection.
  The
economic and operational effects of this new legislation on public companies,
including us, will be significant in terms of the time, resources and costs
associated with complying with the new law.  Because the
Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller
public companies, we will be presented with additional challenges as a smaller,
community-oriented financial institution seeking to compete with larger
financial institutions in our market.
 
 The
Company qualified as an accelerated filer in accordance with Rule 12b-2 of the
Securities Exchange Act of 1934, effective December 31,
2006.  Therefore, the Company was subject to the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”).  The
Company incurred additional consulting and audit expenses in becoming compliant
with SOX 404, and will continue to incur additional audit expenses to comply
with SOX 404 when SOX 404 becomes applicable to smaller reporting
companies.  Management does not expect expenses related to SOX 404 to
have a material impact on the Company’s financial statements.  The
Company qualified as a smaller reporting company effective June 30, 2008, due to
a decrease in market capitalization.  Management does not expect
significant cost savings from this change in filing status, as certification of
the effectiveness of internal controls by management will still be
required.
 
 Emergency Economic Stabilization Act
of 2008.  The Emergency Economic Stabilization Act of 2008
(“EESA”)was enacted in October 2008 in response to the financial
crisis.  Under the EESA, the UST has the authority to take
actions to restore liquidity and stability to the U.S. financial
system.  The CPP was the first program under the UST’s Troubled
Assets Relief Program (“TARP”).  The CPP is a voluntary program in
which selected, healthy financial institutions were encouraged to
participate.  Approved use of the funds includes providing credit to
qualified borrowers, either as companies or individuals, among other
things.  Such participation is intended to support the economic
development of the community and thereby restore the health of the local and
national economy.  On December 23, 2008, the Company entered into a
Securities Purchase Agreement with the UST.  Under the Purchase
Agreement, the Company agreed to issue and sell 25,054 shares of Series A
preferred stock and a warrant to purchase 357,234 shares of common stock
associated with the Company’s participation in the CPP under the
TARP.  Proceeds from this issuance of preferred shares were allocated
between preferred stock and the warrant based on their relative fair values at
the time of the sale.  Of the $25.1 million in proceeds, $24.4 million
was allocated to the Series A preferred stock and $704,000 was allocated to the
common stock warrant.  The discount recorded on the preferred stock
that resulted from allocating a portion of the proceeds to the warrant is being
accreted directly to retained earnings over a five-year period applying a level
yield.  No dividends were declared or paid on the Series A preferred
stock during 2008, and cumulative undeclared dividends at December 31, 2008 were
$28,000.
 
 American Recovery and Reinvestment
Act of 2009.The American Recovery and Reinvestment Act of
2009  was enacted in February 2009 to provide a stimulus to the U.S.
economy in the wake of the economic downturn brought about by the financial
crisis and the resulting credit crunch.  The Company does not expect
any significant impact from this legislation other the restrictions on executive
compensation for companies participating in the TARP.
 
 Government Monetary Policies and
Economic Controls.  Our earnings and growth, as well as the
earnings and growth of the banking industry, are affected by the credit policies
of monetary authorities, including the Federal Reserve. An important function of
the Federal Reserve is to regulate the national supply of bank credit in order
to combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. government securities, changes in reserve
requirements against member bank deposits, and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence overall
growth of bank loans, investments, and deposits, and may also affect interest
rates charged on loans or paid for deposits. The monetary policies of the
Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future.
  In view
of changing conditions in the national economy and in money markets, as well as
the effect of credit policies by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, and loan demand, or their effect on our business
and earnings or on the financial condition of our various
customers.
  Other. Additional regulations
require annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small,
well-capitalized institutions and state chartered institutions examined by state
regulators.  Additional regulations also establish operational and
managerial, asset quality,
  10
 
  earnings
and stock valuation standards for insured depository institutions, as well as
compensation standards.
 
 The Bank
is subject to examination by the FDIC and the Commissioner.  In
addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking.  The Bank, as an insured North Carolina commercial bank, is
prohibited from engaging as a principal in activities that are not permitted for
national banks, unless (i) the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and (ii) the Bank is,
and continues to be, in compliance with all applicable capital
standards.
  Under
Chapter 53 of the North Carolina General Statutes, if the capital stock of a
North Carolina commercial bank is impaired by losses or otherwise, the
Commissioner is authorized to require payment of the deficiency by assessment
upon the bank's shareholders, pro rata, and to the extent necessary, if any such
assessment is not paid by any shareholder, upon 30 days notice, to sell as much
as is necessary of the stock of such shareholder to make good the
deficiency.
 
 ITEM
1A.             RISK
FACTORS
 
 The following are potential risks that
management considers material and that could affect the future operating results
and financial condition of the Bank and the Company.  The risks are
not listed in any particular order of importance, and there is the potential
that there are other risks that have either not been identified or that
management believed to be immaterial but which could in fact adversely affect
the Bank’s operating results and financial condition.
 
 Loss
of key personnel could adversely impact results
 The success of the Bank has been and
will continue to be greatly influenced by the ability to retain the services of
existing senior management.  The Bank has benefited from consistency
within its senior management team, with its top five executives averaging over
16 years of service with the Bank.  The Company has entered into
employment contracts with each of these top management
officials.  Nevertheless, the unexpected loss of the services of any
of the key management personnel, or the inability to recruit and retain
qualified personnel in the future, could have an adverse impact on the business
and financial results of the Bank.
 
 A
significant amount of the Bank’s business is concentrated in lending which is
secured by property located in the Catawba Valley and surrounding
areas
 In
addition to the financial strength and cash flow characteristics of the borrower
in each case, the Bank often secures its loans with real estate collateral. The
real estate collateral in each case provides an alternate source of repayment in
the event of default by the borrower and may deteriorate in value during the
time the credit is extended. If the Bank is required to liquidate the collateral
securing a loan during a period of reduced real estate values to satisfy the
debt, the Bank’s earnings and capital could be adversely affected.
 
 Additionally,
with most of the Bank’s loans concentrated in the Catawba Valley and surrounding
areas, a decline in local economic conditions could adversely affect the values
of the Bank’s real estate collateral. Consequently, a decline in local economic
conditions may have a greater effect on the Bank’s earnings and capital than on
the earnings and capital of larger financial institutions whose real estate loan
portfolios are geographically diverse.
 
 An
inadequate allowance for loan losses would reduce our earnings
 The risk
of credit losses on loans varies with, among other things, general economic
conditions, the creditworthiness of the borrower over the term of the loan and,
in the case of a collateralized loan, the value and marketability of the
collateral for the loan. Management maintains an allowance for loan losses based
upon, among other things, historical experience, an evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Considering such factors, management makes various assumptions and judgments
about the ultimate collectability of the loan portfolio and provides an
allowance for loan losses based upon a percentage of the outstanding balances
within assigned risk grades and for specific loans when their ultimate
collectability is considered questionable. If management’s assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require the Bank
to increase the allowance for loan losses as a part of their examination
process, the Bank’s earnings and capital could be significantly and adversely
affected.  For further discussion related to our process for
determining the appropriate level of the allowance for loan losses, see
“Allowance for Loan Losses” within “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results and Operation” of this Annual Report, which
is included in this Form 10-K as Exhibit 13.
  11
 
 Changes
in interest rates affect profitability and assets
 Changes
in prevailing interest rates may hurt the Bank’s business. The Bank derives its
income primarily from the difference or “spread” between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. In general, the
larger the spread, the more the Bank earns. When market rates of interest
change, the interest the Bank receives on its assets and the interest the Bank
pays on its liabilities will fluctuate. This can cause decreases in the “spread”
and can adversely affect the Bank’s income. Changes in market interest rates
could reduce the value of the Bank’s financial assets. Fixed-rate investments,
mortgage-backed and related securities and mortgage loans generally decrease in
value as interest rates rise. In addition, interest rates affect how much money
the Bank lends. For example, when interest rates rise, the cost of borrowing
increases and the loan originations tend to decrease. If the Bank is
unsuccessful in managing the effects of changes in interest rates, the financial
condition and results of operations could suffer.
 
 We
measure interest rate risk under various rate scenarios using specific criteria
and assumptions. A summary of this process, along with the results of our net
interest income simulations is presented within “Item 7A. Quantitative and
Qualitative Disclosures About Market Risk” of this Annual Report which is
included in this Form 10-K as Exhibit 13.
 
 The
Company’s Business May Be Adversely Affected by Conditions in the Financial
Markets and Economic Conditions
 Since
December 2007, the United States has been in a recession. Business activity
across a wide range of industries and regions is greatly reduced and local
governments and many businesses are in serious difficulty due to the lack of
consumer spending and the lack of liquidity in the credit markets. Unemployment
has increased significantly.
 
 Since
mid-2007, and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity. This was initially triggered by
declines in home prices and the values of subprime mortgages, but spread to all
mortgage and real estate asset classes, to leveraged bank loans and to nearly
all asset classes, including equities. The global markets have been
characterized by substantially increased volatility and short-selling and an
overall loss of investor confidence, initially in financial institutions, but
more recently in companies in a number of other industries and in the broader
markets.
 
 Market
conditions have also led to the failure or merger of a number of prominent
financial institutions. Financial institution failures or near-failures have
resulted in further losses as a consequence of defaults on securities issued by
them and defaults under contracts entered into with such entities as
counterparties. Furthermore, declining asset values, defaults on mortgages and
consumer loans, and the lack of market and investor confidence, as well as other
factors, have all combined to increase credit default swap spreads, to cause
rating agencies to lower credit ratings, and to otherwise increase the cost and
decrease the availability of liquidity, despite very significant declines in
Federal Reserve borrowing rates and other government actions. Some banks and
other lenders have suffered significant losses and have become reluctant to
lend, even on a secured basis, due to the increased risk of default and the
impact of declining asset values on the value of collateral. The foregoing has
significantly weakened the strength and liquidity of some financial institutions
worldwide. In 2008, the U.S. government, the Federal Reserve and other
regulators have taken numerous steps to increase liquidity and to restore
investor confidence, including investing approximately $200 billion in the
equity of other banking organizations, but asset values have continued to
decline and access to liquidity continues to be very limited.
 
 The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon on the
business environment in the markets where the Company operates, in the State of
North Carolina and in the United States as a whole. A favorable business
environment is generally characterized by, among other factors, economic growth,
efficient capital markets, low inflation, high business and investor confidence,
and strong business earnings. Unfavorable or uncertain economic and market
conditions can be caused by: declines in economic growth, business activity or
investor or business confidence; limitations on the availability or increases in
the cost of credit and capital; increases in inflation or interest rates;
natural disasters; or a combination of these or other factors.
 
 Overall,
during 2008, the business environment has been adverse for many households and
businesses in the United States and worldwide. The business environment in North
Carolina and the markets in which the Company operates has been less adverse
than in the United States generally but continues to deteriorate. It is expected
that the business environment in the State of North Carolina, the United States
and worldwide will continue to deteriorate for the foreseeable future. There can
be no assurance that these conditions will improve in the near term. Such
conditions could adversely affect the credit quality of the Company’s loans,
results of operations and financial condition.
  12
  The
Bank faces strong competition from other banks and financial institutions which
can hurt its business
 The
financial services industry is highly competitive.  The Bank competes
against commercial banks, savings banks, savings and loan associations, credit
unions, mortgage banks, brokerage firms, investment advisory firms, insurance
companies and other financial institutions. Many of these entities are larger
organizations with significantly greater financial, management and other
resources than the Bank has.  Moreover, one national money center
commercial bank is headquartered in Charlotte, North Carolina, only 40 miles
from the Bank's primary market area.
 
 While
management believes it can and does successfully compete with other financial
institutions in our market, we may face a competitive disadvantage as a result
of our smaller size and lack of geographic diversification.
  Government
regulations and policies impose limitations and may result in higher operating
costs and competitive disadvantages
 The Bank
is subject to extensive federal government supervision and regulation that is
intended primarily to protect depositors and the FDIC’s Bank Insurance Fund,
rather than the Company’s shareholders. Existing banking laws subject the Bank
to substantial limitations with respect to loans, the purchase of securities,
the payment of dividends and many other aspects of banking business. Some of the
banking laws may increase the cost of doing business or otherwise adversely
affect the Bank and create competitive advantages for non-bank competitors.
There can be no assurance that future legislation or government policy will not
adversely affect the banking industry or the Bank’s operations. Federal economic
and monetary policy may also affect the Bank’s ability to attract deposits, make
loans and achieve satisfactory interest spreads.
 
 The
Government has the ability to change the terms of the TARP agreement at any
time.  Future changes in the TARP agreement could adversely affect the
Company.
 
 Changes
in technology may impact the Bank’s business
 The Bank
uses various technologies in its business and the banking industry is undergoing
rapid technological changes.  The effective use of technology
increases efficiency and enables financial institutions to reduce
costs.  The Bank’s future success will depend in part on its ability
to address the needs of its customers by using technology to provide products
and services that will satisfy customer demands for convenience as well as
create additional efficiencies in the Bank’s operations.  The Bank’s
competitors may have substantially greater resources to invest in technological
improvements.
 
 The trading volume in our common
stock is less than that of larger public companies which can cause price
volatility
 The trading history of our common stock has been characterized by relatively low
trading volume. The value of a shareholder’s investment may be subject to sudden
decreases due to the volatility of the price of our common stock, which trades
on the NASDAQ Global Market.
 
 The
market price of our common stock may be volatile and subject to fluctuations in
response to numerous factors, including, but not limited to, the factors
discussed in other risk factors and the following:
 ·
                      actual
      or anticipated fluctuation in our operating
  results;
 ·
                      changes
      in interest rates;
 ·
                      changes
      in the legal or regulatory environment in which we
  operate;●
                      press
      releases, announcements or publicity relating to us or our competitors or
      relating to trends in our industry;
 ·
                      changes
      in expectations as to our future financial performance, including
      financial estimates or recommendations by securities analysts and
      investors;●
                      future
      sales of our common stock;●
                      changes
      in economic conditions in our market, general conditions in the U.S.
      economy, financial markets or the banking industry; and●
                      other
      developments affecting our competitors or
us.
      These factors may adversely affect the trading price of our common stock,
regardless of our actual operating performance, and could prevent a shareholder
from selling common stock at or above the current market price.
  13
 
 We may be subject to examinations by
taxing authorities which could adversely affect our results of
operations
 In
the normal course of business, we may be subject to examinations from federal
and state taxing authorities regarding the amount of taxes due in connection
with investments we have made and the businesses in which we are engaged.
Recently, federal and state taxing authorities have become increasingly
aggressive in challenging tax positions taken by financial institutions. The
challenges made by taxing authorities may result in adjustments to the timing or
amount of taxable income or deductions or the allocation of income among tax
jurisdictions. If any such challenges are made and are not resolved in our
favor, they could have an adverse effect on our financial condition and results
of operations.
 
 We
may not be able to pay dividends in the future in accordance with past
practice
 We have
in the past paid a quarterly dividend to shareholders.  However, we
are dependent primarily upon the Bank for our earnings and funds to pay
dividends on our common stock. The payment of dividends also is subject to legal
and regulatory restrictions. Any payment of dividends in the future will depend,
in large part, on the Bank’s earnings, capital requirements, financial condition
and other factors considered relevant by our Board of
Directors.
 
 Under the
terms of the CPP, the UST has a preferential right to the payment of cumulative
dividends on the CPP Series A preferred stock.  No dividends are
permitted to be paid to common shareholders unless all accrued and unpaid
dividends for all past dividend periods on the CPP preferred stock were fully
paid. Any increase in dividends to common shareholders above the amount last
declared prior to October 14, 2008 ($0.12 per share quarterly in the case of the
Company) is subject to the consent of the UST for the first three years of the
CPP preferred stock investment.
 
 Changes
in our accounting policies or in accounting standards could materially affect
how we report our financial results and condition
 Our
accounting policies are fundamental to understanding our financial results and
condition. Some of these policies require use of estimates and assumptions that
may affect the value of our assets or liabilities and financial results. Some of
our accounting policies are critical because they require management to make
difficult, subjective and complex judgments about matters that are inherently
uncertain and because it is likely that materially different amounts would be
reported under different conditions or using different assumptions.
 
 From time to time the Financial
Accounting Standards Board (FASB) and the SEC change the financial accounting
and reporting standards or the interpretation of those standards that govern the
preparation of our external financial statements. These changes are beyond our
control, can be hard to predict and could materially impact how we report our
results of operations and financial condition. We could be required to apply a
new or revised standard retroactively, resulting in our restating prior period
financial statements in material amounts.
 
 Our
internal controls may be ineffective
 Management
regularly reviews and updates our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations, and financial condition.
 
 Impairment
of investment securities or deferred tax assets could require charges to
earnings, which could result in a negative impact on our results of
operations
 In
assessing the impairment of investment securities, management considers the
length of time and extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issues, and the intent and
ability of the Corporation to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value in the
near term. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The impact of
each of these impairment matters could have a material adverse effect on our
business, results of operations, and financial condition.
 
 We
rely on other companies to provide key components of our business
infrastructure
 Third
party vendors provide key components of our business infrastructure such as
internet connections, network access and core application processing. While we
have selected these third party vendors carefully, we do not control their
actions. Any problems caused by these third parties, including as a result of
their not providing us their services for any reason or their performing their
services poorly, could adversely affect our ability to deliver products and
services to
  14
 
  our
customers and otherwise to conduct our business. Replacing these third party
vendors could also entail significant delay and expense.
 
 Our
information systems may experience an interruption or breach in
security
 We rely
heavily on communications and information systems to conduct our business. Any
failure, interruption, or breach in security or operational integrity of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan, and other systems. While we have
policies and procedures designed to prevent or limit the effect of the failure,
interruption, or security breach of our information systems, we cannot assure
you that any such failures, interruptions, or security breaches will not occur
or, if they do occur, that they will be adequately addressed. The occurrence of
any failures, interruptions, or security breaches of our information systems
could damage our reputation, result in a loss of customer business, subject us
to additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability, any of which could have a material adverse effect on our
financial condition and results of operations.
 
 New
requirements under EESA and changes in the TARP CPP regulations may adversely
affect our operations and financial condition
 Given the
current international, national and regional economic climate, it is unclear
what effect the provisions of the EESA will have with respect to our
profitability and operations. In addition, the US government, either through the
UST or some other federal agency, may also advance additional programs that
could materially impact our profitability and operations.
 
 Liquidity
is essential to our businesses
 Our
liquidity could be impaired by an inability to access the capital markets or
unforeseen outflows of cash. This situation may arise due to circumstances that
we may be unable to control, such as a general market disruption or an
operational problem that affects third parties or us. Our credit ratings are
important to our liquidity. A reduction in our credit ratings could adversely
affect our liquidity and competitive position, increase our borrowing costs,
limit our access to the capital markets or trigger unfavorable contractual
obligations.
 
 Negative
publicity could damage our reputation
 Reputation
risk, or the risk to our earnings and capital from negative public opinion, is
inherent in our business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse legal and
regulatory consequences. Negative public opinion could result from our actual or
alleged conduct in any number of activities, including lending practices,
corporate governance, regulatory compliance, mergers and acquisitions, and
disclosure, sharing or inadequate protection of customer information, and from
actions taken by government regulators and community organizations in response
to that conduct.
 
 Financial
services companies depend on the accuracy and completeness of information about
customers and counterparties
 In
deciding whether to extend credit or enter into other transactions, we may rely
on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports, and other financial information.
We may also rely on representations of those customers, counterparties, or other
third parties, such as independent auditors, as to the accuracy and completeness
of that information. Reliance on inaccurate or misleading financial statements,
credit reports, or other financial information could cause us to enter into
unfavorable transactions, which could have a material adverse effect on our
financial condition and results of operations.
 
 
 ITEM
1B.              
UNRESOLVED STAFF COMMENTS
 
 Not applicable.
  15
  ITEM
2.         
        PROPERTIES
 
 At
December 31, 2008, the Bank conducted its business from the headquarters office
in Newton, North Carolina, its Banco de la Gente administrative office and its
21 other branch offices in Lincolnton, Hickory, Newton, Catawba, Conover,
Claremont, Maiden, Denver, Triangle, Hiddenite, Charlotte, Monroe, Cornelius,
Mooresville and Raleigh, North Carolina.  The Bank also operates a
loan production office in Denver, North Carolina.  The following table
sets forth certain information regarding the Bank's properties at December 31,
2008.
 Owned
                        Corporate
      Office
                        518
      West C Street
                        Newton,
      North Carolina  28658
                        
                        420
      West A Street
                        Newton,
      North Carolina 28658
                        
                        2619
      North Main Avenue
                        Newton,
      North Carolina  28658
                        
                        213
      1st Street, West
                        Conover,
      North Carolina  28613
                        
                        3261
      East Main Street
                        Claremont,
      North Carolina  28610
                        
                        6125
      Highway 16 South
                        Denver,
      North Carolina  28037
                        
                        5153
      N.C. Highway 90E
                        Hiddenite,
      North Carolina  28636
                        
                        200
      Island Ford Road
                        Maiden,
      North Carolina  28650
                        
                        3310
      Springs Road NE
                        Hickory,
      North Carolina  28601
                        
                        142
      South Highway 16
                        Denver,
      North Carolina  28037
                        
                        106
      North Main Street
                        Catawba,
      North Carolina 28609
                        
                        2050
      Catawba Valley Boulevard
                        Hickory,
      North Carolina  28601
                        
                        800
      E. Arrowood Road
                        Charlotte,
      NC  28217
                        
                        1074
      River Highway
                        Mooresville,
      NC, 28117
                      Leased
                        1333
      2nd Street NE
                        Hickory,
      North Carolina  28601
                        
                        1910
      East Main Street
                        Lincolnton,
      North Carolina  28092
                        
                        760
      Highway 27 West
                        Lincolnton,
      North Carolina 28092
                        
                        102
      Leonard Avenue
                        Newton,
      North Carolina 28658
                        
                        6300
      South Boulevard
                        Suite
      100
                        Charlotte,
      North Carolina 28217
                        
                        4451
      Central Avenue
                        Suite
      A
                        Charlotte,
      North Carolina  28205
                        
                        3752/3754
      Highway 16 North
                        Denver,
      North Carolina  28037
                        
                        501
      West Roosevelt Boulevard
                        Monroe,
      NC  28110
                        
                        9624-I
      Bailey Road
                        Cornelius,
      North Carolina  28031
                        
                        4011
      Capital Boulevard
                        Raleigh,
      NC  27604
  ITEM
3.                
LEGAL PROCEEDINGS
 
 In the
opinion of management, the Company is not involved in any material pending legal
proceedings other than routine proceedings occurring in the ordinary course of
business.
 
 ITEM
4.             
   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 No matter
was submitted to a vote of the Company’s shareholders during the quarter ended
December 31, 2008.
  16
  PART
II
 
 ITEM 5.
                        MARKET FOR REGISTRANT'S COMMON
      EQUITY, RELATED SHAREHOLDER  MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
 
 The
information required by this Item is set forth under the section captioned
"Market for the Company’s Common Equity and Related Shareholder Matters" on page
A-28 of the Annual Report.  The Annual Report is included in this Form
10-K as Exhibit (13).  See "Item 1.  BUSINESS--Supervision
and Regulation" above for regulatory restrictions which limit the ability of the
Company to pay dividends.
 
 The
information required by Item 201(d) concerning securities authorized for
issuance under equity compensation plans is set forth in Item 12 hereof.
  ISSUER
      PURCHASES OF EQUITY SECURITIESPeriod
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                Total
                                                                                                                                                                                                                                                                  Number
      of
                                                                                                                                                                                                                                                                  Shares
                                                                                                                                                                                                                                                                  Purchased
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                Average
                                                                                                                                                                                                                                                                  Price
      Paid
                                                                                                                                                                                                                                                                  per
      Share
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                Total
                                                                                                                                                                                                                                                                  Number
      of
                                                                                                                                                                                                                                                                  Shares
                                                                                                                                                                                                                                                                  Purchased
      as
                                                                                                                                                                                                                                                                  Part
      of
                                                                                                                                                                                                                                                                  Publicly
                                                                                                                                                                                                                                                                  Announced
                                                                                                                                                                                                                                                                  Plans
      or
                                                                                                                                                                                                                                                                  Programs
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                Maximum
      Number
                                                                                                                                                                                                                                                                  of
      Shares that May
                                                                                                                                                                                                                                                                  Yet
      Be Purchased
                                                                                                                                                                                                                                                                  Under
      the Plans or
                                                                                                                                                                                                                                                                  Programs*January
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                24,503
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (1)February
      1 - 28, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                26,256
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                14.00
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                25,000
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -March
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                100,000
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)April
      1 - 30, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                100,000
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)May
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                1,215
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                14.03
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                100,000
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)June
      1 - 30, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                15,875
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                12.83
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                15,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)July
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)August
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)September
      1 - 30, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                2,510
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                11.59
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)October
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)November
      1 - 30, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                904
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                11.26
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                -
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                84,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)December
      1 - 31, 2008
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                50,425
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                11.54
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                50,000
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                34,500
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                (2)Total
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                97,185
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                                12.45
                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                90,500(1) Reflects
      number of shares that may yet be purchased under the Stock Repurchase Plan
      through the end of August 31, 2008 as authorized by the Company's Board of
      Directors in August 2007.(2) Reflects
      number of shares that may yet be purchased under the Stock Repurchase Plan
      through the end of March 31, 2009 as authorized by the Company's Board of
      Directors in March 2008.*Due
      to the Company's participation in the CPP, UST approval is required for
      the Company to repurchaseshares
      of outstanding common stock.
 The
information required by Item 201(e), the Performance Graph, is set forth in the
section captioned “Stock Performance Graph” on page A-29 of the Annual Report,
which is included in this Form 10-K as Exhibit (13).
  17
  On
December 23, 2008, the Company issued 25,054 shares of Series A preferred stock
and a warrant to purchase 357,234 shares of the Company's common stock to the
United States Department of the Treasury through a private placement. This
issuance of shares was not registered under the Securities Act of 1933 in
reliance on the exemption set for in Section 4(2) thereof.
 
 ITEM
6.                 SELECTED
FINANCIAL DATA
 
 The
information required by this Item is set forth in the table captioned "Selected
Financial Data" on page A-3 of the Annual Report, which table is included in
this Form 10-K as Exhibit (13).
 
 ITEM
      7.
                        MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF
      OPERATIONS
 
 The
information required by this Item is set forth in the section captioned
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” on pages A-4 through A-29 of the Annual Report, which section is
included in this Form 10-K as Exhibit (13).
 
 ITEM
      7A.
                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 The
information required by this Item is set forth in the section captioned
“Quantitative and Qualitative Disclosures About Market Risk” on page A-26 of the
Annual Report, which section is included in this Form 10-K as Exhibit
(13).
 
 ITEM
      8.
                        FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
 
 The
consolidated financial statements of the Company and supplementary data set
forth on pages A-30 through A-61 of the Annual Report are included in this Form
10-K as Exhibit (13).
 
 ITEM
      9.
                        CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 Not
applicable.
      18
  ITEM
      9A.
                          CONTROLS
      AND PROCEDURES
 
 The Company’s management, under the
supervision and with the participation of the Chief Executive Officer and the
Chief Financial Officer of the Company have concluded, based on their evaluation
as
of the end of the period covered by this Report, that the Company’s
disclosure controls and procedures (as defined in Rule 13A-15(e) promulgated
under the Exchange Act) are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the applicable rules and
forms.
 
 There
have been no significant changes in internal control over financial reporting
during the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  MANAGEMENT’S
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting.  Internal control over
financial reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934.  The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of
America.  Internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and depositions
of the assets of the company, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that could
have a material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
assessed the effectiveness of the internal control over financial reporting as
of December 31, 2008.  In making this assessment, management used the
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on our assessment and those criteria, management
believes that the Company maintained effective internal control over financial
reporting as of December 31, 2008.
 
 The
Company’s independent registered public accountants have issued an audit report
on our assessment of the company’s internal control over financial
reporting.  Their report is included herein.
 
  
 /s/
      Tony W. Wolfe
                                  
                                  /s/
      A. Joseph LampronTony
      W. Wolfe
                                  
                                  A.
      Joseph LampronChief
      Executive Officer
                                  
                                  Chief
      Financial OfficerMarch
      20, 2009
                                  
                                  March
      20, 2009
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
 
 ITEM
9B.              OTHER
INFORMATION
 
 None
   19
  PART
III
 
 ITEM
      10.
                          DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
REGISTRANT
 
 The
information required by this Item regarding directors and executive officers of
the Company is set forth under the sections captioned “Proposal 1 - Election of
Directors - Nominees” contained in the Proxy Statement and “Proposal 1 -
Election of Directors - Executive Officers” contained in the Proxy Statement,
which sections are incorporated herein by reference.
 
 The
information required by this Item regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is set forth under the section captioned
“Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy
Statement, which section is incorporated herein by reference.
 
 The
information required by this Item regarding identification of members of the
Company’s Audit Committee is set forth under the section captioned “Proposal 1 -
Election of Directors” contained in the Proxy Statement, which section is
incorporated herein by reference.
 
 The
Company has adopted a Code of Ethics that applies to the Company’s employees,
including the principal executive officer and principal financial
officer.  The Company has also adopted a written charter for the Audit
Committee, which is reviewed annually, and amended as needed, by the
Committee.  The Company will provide to any person, without charge,
upon request, a copy of these documents.  To request a copy, a written
request should be submitted to the Company’s corporate headquarters, addressed
to the attention of A. Joseph Lampron, Chief Financial Officer.  These
documents are also available on the Bank’s website (www.peoplesbanknc.com) under
“Investor Relations.”
 
 ITEM
      11.
                          EXECUTIVE
      COMPENSATION
 
 The
information required by this Item is set forth under the sections captioned
“Proposal 1 - Election of Directors” contained in the Proxy Statement, which
sections are incorporated herein by reference.
 
 ITEM
      12.
                          SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT
 
 The
information required by this Item is incorporated by reference from the section
captioned “Security Ownership of Certain Beneficial Owners and Management”
contained in the Proxy Statement and the section captioned “Equity Compensation
Plan Information” contained in the Proxy Statement.
 
 ITEM
      13.
                          CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS
 
 See the
section captioned “Proposal 1 - Election of Directors - Indebtedness of and
Transactions with Management and Directors” contained in the Proxy Statement,
which section is incorporated herein by reference.
 
 ITEM
14.         
      PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
 See the
section captioned “Proposal 4 - Ratification of Selection of Independent
Auditor” contained in the Proxy Statement, which section is incorporated herein
by reference.
 20
  PART
IV
  ITEM
      15.
                                                        
                                                        EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES15(a)1.
                                                        
                                                        Consolidated
      Financial Statements (contained in the Annual Report attached hereto as
      Exhibit (13)and
      incorporated herein by reference)(a)
                                                        Report
      of Independent Registered Public Accounting Firm(b)
                                                        Consolidated
      Balance Sheets as of December 31, 2008 and 2007(c)
                                                        Consolidated
      Statements of Earnings for the Years Ended December 31, 2008, 2007
      and2006(d)
                                                        Consolidated
      Statements of Changes in Shareholders' Equity for the Years
      EndedDecember
      31, 2008, 2007 and 2006(e)
                                                        Consolidated
      Statements of Comprehensive Income for the Years Ended December
      31,2008,
      2007 and 2006(f)
                                                        Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008,
      2007and
      2006(g)
                                                        Notes
      to Consolidated Financial Statements15(a)2.
                                                        
                                                        Consolidated
      Financial Statement SchedulesAll
      schedules have been omitted, as the required information is either
      inapplicable or included inthe
      Notes to Consolidated Financial Statements.15(a)3.
                                                        
                                                        Exhibits
  Exhibit
      (3)(1)
                                                                      Articles
      of Amendment dated December 19, 2008, regarding the Series APreferred
      Stock, incorporated by reference to Exhibit (3)(1) to the Form
  8-K
      filed with the Securities and Exchange Commissionon December
  29,2008Exhibit
      (3)(i)
                                                                      Articles
      of Incorporation of Peoples Bancorp of North Carolina, Inc.,incorporated
      by reference to Exhibit (3)(i) to the Form 8-A filed with theSecurities
      and Exchange Commission on September 2, 1999Exhibit
      (3)(ii)
                                                                      Amended
      and Restated Bylaws of Peoples Bancorp of North Carolina,Inc.,
      incorporated by reference to Exhibit (3)(ii) to the Form 10-Q filedwith
      the Securities and Exchange Commission on November 7,
  2007Exhibit
      (4)
                                                                      Specimen
      Stock Certificate, incorporated by reference to Exhibit (4) to theForm
      8-A filed with the Securities and Exchange Commission
    onSeptember
      2, 1999Exhibit
      (4)(1)
                                                                      Form
      of Certificate for the Series A Preferred Stock, incorporated
      byreference
      to Exhibit (4)(1) to the Form 8-K filed with the Securities
      andExchange
      Commission on December 29, 2008Exhibit
      (4)(2)
                                                                      Warrant
      dated December 23, 2008, for the purchase of shares of
      CommonStock,
      incorporated by reference to Exhibit (4)(2) to the Form 8-K
      filedwith
      the Securities and Exchange Commission on December 29,
      2008
   21
   Exhibit
      (10)(1)
                                    Letter
      Agreement dated December 23, 2008 between the Registrant and
      theUnited
      States Department of the Treasury, incorporated by reference
      toExhibit
      (10)(1) to the Form 8-K filed with the Securities and
    ExchangeCommission
      on December 29, 2008Exhibit
      (10)(a)(i)
                                    Employment
      Letter Agreement dated December 23, 2008 between
PeoplesBancorp
      of North Carolina, Inc. and Tony W. Wolfe, incorporated
  byreference
      to Exhibit (10)(a)(i) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(a)(ii)
                                    Amendment
      to Employment Agreement between Peoples Bank and TonyW.
      Wolfe dated December 18, 2008, incorporated by reference to
      Exhibit(10)(a)(ii)
      to the Form 8-K filed with the Securities and ExchangeCommission
      on December 29, 2008Exhibit
      (10)(a)(iii)
                                    Amended
      and Restated Executive Salary Continuation Agreement
    betweenPeoples
      Bank and Tony W. Wolfe dated December 18, 2008,
    incorporatedby
      reference to Exhibit (10)(a)(iii) to the Form 8-K filed with
      theSecurities
      and Exchange Commission on December 29, 2008Exhibit
      (10)(b)(i)
                                    Employment
      Letter Agreement dated December 23, 2008 between
PeoplesBancorp
      of North Carolina, Inc. and Joseph F. Beaman, Jr., incorporated
      byreference
      to Exhibit (10)(b)(i) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(b)(ii)
                                    Amendment
      to Employment Agreement between Peoples Bank and JosephF.
      Beaman, Jr. dated December 18, 2008, incorporated by reference
      toExhibit
      (10)(b)(ii) to the Form 8-K filed with the Securities and
      ExchangeCommission
      on December 29, 2008Exhibit
      (10)(b)(iii)
                                    Amended
      and Restated Executive Salary Continuation Agreement
    betweenPeoples
      Bank and Joseph F. Beaman, Jr. dated December 18, 2008,incorporated
      by reference to Exhibit (10)(b)(iii) to the Form 8-K filed
      withthe
      Securities and Exchange Commission on December 29, 2008Exhibit
      (10)(c)(i)
                                    Employment
      Letter Agreement dated December 23, 2008 between
PeoplesBancorp
      of North Carolina, Inc. and William D. Cable, Sr.,
      incorporatedby
      reference to Exhibit (10)(c)(i) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(c)(ii)
                                    Amendment
      to Employment Agreement between Peoples Bank andWilliam
      D. Cable, Sr. dated December 18, 2008, incorporated byreference
      to Exhibit (10)(c)(ii) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(c)(iii)
                                    Amended
      and Restated Executive Salary Continuation Agreement
    betweenPeoples
      Bank and William D. Cable, Sr. dated December 18, 2008,incorporated
      by reference to Exhibit (10)(c)(iii) to the Form 8-K filed
      withthe
      Securities and Exchange Commission on December 29, 2008Exhibit
      (10)(d)(i)
                                    Employment
      Letter Agreement dated December 23, 2008 between
PeoplesBancorp
      of North Carolina, Inc. and Lance A. Sellers, incorporated
    byreference
      to Exhibit (10)(d)(i) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(d)(ii)
                                    Amendment
      to Employment Agreement between Peoples Bank and LanceA..
      Sellers dated December 18, 2008, incorporated by reference to
      Exhibit(10)(d)(ii)
      to the Form 8-K filed with the Securities  and
      ExchangeCommission
      on December 29,
2008
   22
   Exhibit
      (10)(d)(iii)
                              Amended
      and Restated Executive Salary Continuation Agreement
    betweenPeoples
      Bank and Lance A. Sellers dated December 18, 2008,incorporated
      by reference to Exhibit (10)(d)(iii) to the Form 8-K filed
      withthe
      Securities and Exchange Commission on December 29, 2008Exhibit
      (10)(e)
                              Peoples
      Bancorp of North Carolina, Inc. Omnibus Stock Ownership
  andLong
      Term Incentive Plan incorporated by reference to Exhibit (10)(f)
      tothe
      Form 10-K filed with the Securities and Exchange Commission
    onMarch
      30, 2000Exhibit
      (10)(e)(i)
                              Amendment
      No. 1 to the Peoples Bancorp of North Carolina, Inc.Omnibus
      Stock Ownership and Long Term Incentive Plan incorporated
    byreference
      to (10)(e)(i) to the Form 10-K filed with the
Securitiesand
      Exchange Commission on March 15, 2007Exhibit
      (10)(f)(i)
                              Employment
      Letter Agreement dated December 23, 2008 between
PeoplesBancorp
      of North Carolina, Inc. and A. Joseph Lampron, incorporated
    byreference
      to Exhibit (10)(f)(i) to the Form 8-K filed with the
      Securitiesand
      Exchange Commission on December 29, 2008Exhibit
      (10)(f)(ii)
                              Amendment
      to Employment Agreement between Peoples Bank and A.Joseph
      Lampron dated December 18, 2008, incorporated by reference
    toExhibit
      (10)(f)(ii) to the Form 8-K filed with the Securities  and
      ExchangeCommission
      on December 29, 2008Exhibit
      (10)(f)(iii)
                              Amended
      and Restated Executive Salary Continuation Agreement
    betweenPeoples
      Bank and A. Joseph Lampron dated December 18, 2008,incorporated
      by reference to Exhibit (10)(f)(iii) to the Form 8-K filed
      withthe
      Securities and Exchange Commission on December 29, 2008Exhibit
      (10)(g)
                              Peoples
      Bank Directors' and Officers' Deferral Plan, incorporated
    byreference
      to Exhibit (10)(h) to the Form 10-K filed with the
    Securitiesand
      Exchange Commission on March 28, 2002Exhibit
      (10)(h)
                              Rabbi
      Trust for the Peoples Bank Directors' and Officers' Deferral
      Plan,incorporated
      by reference to Exhibit (10)(i) to the Form 10-K filed with
      theSecurities
      and Exchange Commission on March 28, 2002Exhibit
      (10)(i)
                              Description
      of Service Recognition Program maintained by Peoples
  Bank,incorporated
      by reference to Exhibit (10)(i) to the Form 10-K filed with
      theSecurities
      and Exchange Commission on March 27, 2003Exhibit
      (10)(j)
                              Capital
      Securities Purchase Agreement dated as of June 26, 2006, by
      andamong
      Peoples Bancorp of North Carolina, Inc., PEBK Capital Trust
    IIand
      Bear, Sterns Securities Corp. incorporated by reference to
      Exhibit10(j)
      to the Form 10-Q filed with the Securities and ExchangeCommission
      on November 13, 2006Exhibit
      (10)(k)
                              Amended
      and Restated Trust Agreement of PEBK Capital Trust II,
    datedas
      of June 28, 2006 incorporated by reference to Exhibit (10)(k) to
      theForm
      10-Q filed with the Securities and Exchange Commission
  onNovember
      13, 2006Exhibit
      (10)(l)
                              Guarantee
      Agreement of Peoples Bancorp of North Carolina, Inc. dated
    asof
      June 28, 2006 incorporated by reference to Exhibit (10)(l) to the
      Form10-Q
      filed with the Securities and Exchange Commission on
    November13,
      2006
   23
   Exhibit
      (10)(m)
                              Indenture,
      dated as of June 28, 2006, by and between Peoples Bancorp
    ofNorth
      Carolina, Inc. and LaSalle Bank National Association, as
      Trustee,relating
      to Junior Subordinated Debt Securities Due September 15,
    2036,incorporated
      by reference to Exhibit (10)(m) to the Form 10-Q filed with
      theSecurities
      and Exchange Commission on November 13, 2006Exhibit
      (10)(n)
                              Form
      of Amended and Restated Director Supplemental
RetirementAgreement
      between Peoples Bank and Directors Robert C. Abernethy,James
      S. Abernethy, Douglas S. Howard, John W. Lineberger, Jr., Gary
      E.Matthews,
      Dr. Billy L. Price, Jr., Larry E. Robinson, W. Gregory
    Terry,Dan
      Ray Timmerman, Sr., and Benjamin I. Zachary, incorporated
    byreference
      to Exhibit (10)(n) to the Form 8-K filed with the Securities
      andExchange
      Commission on December 29, 2008Exhibit
      (10)(o)
                              2009
      Peoples Bancorp of North Carolina, Inc. Omnibus Stock
      Ownershipand
      Long Term Incentive PlanExhibit
      (11)
                              Statement
      regarding computation of per share earningsExhibit
      (12)
                              Statement
      regarding computation of ratiosExhibit
      (13)
                              2008
      Annual Report of Peoples Bancorp of North Carolina,
Inc.Exhibit
      (14)
                              Code
      of Business Conduct and Ethics of Peoples Bancorp of
  NorthCarolina,
      Inc., incorporated by reference to Exhibit (14) to the Form
      10-Kfiled
      with the Securities and Exchange Commission on March 25,
    2005Exhibit
      (21)
                              Subsidiaries
      of the RegistrantExhibit
      (23)
                              Consent
      of Porter Keadle Moore, LLPExhibit
      (31)(a)
                              Certification
      of principal executive officer pursuant to section 302 of
    theSarbanes-Oxley
      Act of 2002Exhibit
      (31)(b)
                              Certification
      of principal financial officer pursuant to section 302 of
    theSarbanes-Oxley
      Act of 2002Exhibit
      (32)
                              Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
  toSection
      906 of the Sarbanes-Oxley Act of
2002
   24
 SIGNATURESPursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its
      behalf by the undersigned, thereunto duly
  authorized.
   PEOPLES
      BANCORP OF NORTH CAROLINA, INC.(Registrant)By:
                                      /s/
      Tony W. WolfeTony
      W. WolfePresident
      and Chief Executive OfficerDate: 
      March 20,
2009
   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
  Signature
                                  
                                  Title
                                  
                                  Date/s/
      Tony W. Wolfe
                                  
                                  President
      and Chief Executive Officer
                                  
                                  March
      20, 2009Tony
      W. Wolfe
                                  
                                  (Principal
      Executive Officer)/s/
      James S. Abernethy
                                  
                                  Director
                                  
                                  March
      20, 2009James
      S. Abernethy/s/
      Robert C. Abernethy
                                  
                                  Chairman
      of the Board and Director
                                  
                                  March
      20, 2009Robert
      C. Abernethy/s/
      Douglas S. Howard
                                  
                                  Director
                                  
                                  March
      20, 2009Douglas
      S. Howard/s/
      A. Joseph Lampron
                                  
                                  Executive
      Vice President and Chief
                                  
                                  March
      20, 2009A.
      Joseph Lampron
                                  
                                  Financial
      Officer (Principal Financialand
      Principal Accounting Officer)/s/
      John W. Lineberger, Jr.
                                  
                                  Director
                                  
                                  March
      20, 2009John
      W. Lineberger, Jr./s/
      Gary E. Matthews
                                  
                                  Director
                                  
                                  March
      20, 2009Gary
      E. Matthews/s/
      Billy L. Price, Jr., M.D.
                                  
                                  Director
                                  
                                  March
      20, 2009Billy
      L. Price, Jr., M.D./s/
      Larry E. Robinson
                                  
                                  Director
                                  
                                  March
      20, 2009Larry
      E. Robinson/s/
      William Gregory Terry
                                  
                                  Director
                                  
                                  March
      20, 2009William
      Gregory Terry/s/
      Dan Ray Timmerman, Sr.
                                  
                                  Director
                                  
                                  March
      20, 2009Dan
      Ray Timmerman, Sr./s/
      Benjamin I. Zachary
                                  
                                  Director
                                  
                                  March
      20, 2009Benjamin
      I. Zachary
  
  25