UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.   20549


FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended:   December 31, 2009Peoples 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
x




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act


Yes
o
No
x


Indicate 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
o




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes
x
No
o




Indicate 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 in Part III of this Form 10-K or any amendment to this Form 10-K.      x





Indicate 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
x




State 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.  $27,086,476 based on the closing price of such common stock on June 30, 2009, which was $6.15 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, 2010.













DOCUMENTS INCORPORATED BY REFERENCE
 
 Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2009 (the “Annual Report”), which will be included as Appendix A to the Proxy Statement for the 2010 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 2010 Annual Meeting of Shareholders of Peoples Bancorp of North Carolina, Inc. to be held on May 6, 2010 (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






Notice of 2010Annual Meeting,2009 Form
Proxy Statement10-K
and Annual ReportPage
PagePART IItem 1 - Business
4 - 11
N/AItem 1A - Risk Factors
11 - 16
N/AItem 1B - Unresolved Staff Comments
16
N/AItem 2 - Properties
16
N/AItem 3 - Legal Proceedings
16
N/AItem 4 - Submission of Matters to a Vote of Security Holders
17
N/APART IIItem 4 - Market for the Common Equity, Related Shareholder Matters andIssuer Purchases of Equity Securities
18 - 20
N/AItem 5 - Selected Financial Data
20
A-3Item 6 - Management's Discussion and Analysis of Financial Condition andResults of Operations
20
A-4 - A-31Item 6A - Quantitative and Qualitative Disclosures About Market Risk
20
A-30Item 7 - Financial Statements and Supplementary Data
20
A-32 - A-66Item 8 - Changes in and Disagreements with Accountants on Accountingand Financial Disclosure
21
N/AItem 8A - Controls and Procedures
21
N/AItem 8B - Other Information
21
N/APART IIIItem 9 - Directors and Executive Officers of the Registrant
22
A-67Item 10 - Executive Compensation
22
18 - 28Item 11 - Security Ownership of Certain Beneficial Owners and Management
22 - 23
5 - 8Item 12 - Certain Relationships and Related Transactions
23
28 - 29Item 13 - Principal Accountant Fees and Services
23
30PART IVItem 14 - Exhibits and Financial Statement Schedules
24 - 27
N/ASignatures
28
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 22 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, 2009, the Company had total assets of $1.0 billion, net loans of $762.6 million, deposits of $809.3 million, total securities of $201.5 million, and shareholders’ equity of $99.2 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-31 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, 2009, the Bank employed 267 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.
 
 The Company established a new subsidiary, Community Bank Real Estate Solutions, LLC (“CBRES”), during second quarter 2009.  CBRES serves as a “clearing-house” for appraisal services for community banks.  Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located.  This type of service ensures that the appraisal process remains independent from the financing process within the bank.
 
 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), Catawba Valley Medical Center, Catawba County, CV Industries (furniture manufacturer), Ethan Allen (furniture manufacturer) and Hickory Public Schools.
 
 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, 2009 comparative data, the Bank had 21.96% of the deposits in Catawba County, placing it second in deposit size among a total of 14 banks with branch offices in Catawba County; 15.01% of the deposits in Lincoln County, placing it third in deposit size among a total of ten banks with branch offices in Lincoln County and 12.77 % 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.
  5
  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.  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
 
 6
 
 
 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, 2009.  At December 31, 2009, the Company’s Tier I risk-based capital and total risk-based capital were 13.74% and 15.00%, respectively.
 
 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 December 23, 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 Bank’s deposits, therefore, are subject to FDIC deposit insurance assessment.
 
 On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points; and due to extraordinary circumstances, extended the time within which the reserve ratio must be returned to 1.15 percent from five to seven years. The Bank‘s base assessment averaged 12.94 basis points in 2009.  On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The Bank incurred an expense of $453,000 in 2009 as a result of the special assessment.
 
 On November 12, 2009, the FDIC amended its regulations requiring certain insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid assessment for these periods was collected on December 30, 2009, along with each institution's regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. The prepayment has been treated as a prepaid expense on the books of the Company, and will be recognized as expense in the period for which the assessments are effective.
  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”).
  The TAGP provided 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
 
 7
 
 
 participating in the TAGP are 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.   The $250,000 deposit insurance coverage limit was scheduled to return to $100,000 on January 1, 2010, but was extended by congressional action until December 31, 2013.  The TLGP has been extended to cover debt of FDIC-insured institutions issued through April 30, 2010, and the TAGP has been extended through June 30, 2010. The Company has participated in the TAGP since its beginning, and has elected to continue its participation during the extension period.
  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 Company is eligible to participate in the DGP although the it 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, 2009, 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.
 
 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.  The Company paid dividends of $1.1 million on the Series A preferred stock during 2009 and cumulative undeclared dividends at December 31, 2009 were $157,000.
 
 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 took 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 2009, 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 requirements of the TARP at any time.  Future changes in the TARP requirements 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.
 
 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
 
 13
 
 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 December 23, 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 our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.
  14
 
 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 CPP requirements 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.
 
 Increases in FDIC insurance premiums may adversely affect our earnings
 During 2008 and 2009, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund. In addition, the FDIC instituted two temporary programs to further insure customer deposits at FDIC insured banks: deposit accounts are currently insured up to $250,000 per customer (up from $100,000) and non-interest bearing transactional accounts at institutions participating in the Transaction Account Guarantee Program are currently fully insured (unlimited coverage). These programs have placed additional stress on the Deposit Insurance Fund.
  In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted fund.
  The Company is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures the Company may be required to pay even higher FDIC premiums than the recently increased levels. Further, on January 12, 2010, the FDIC requested comments on a proposed rule tying assessment rates of FDIC-insured institutions to the institution’s employee compensation programs. The exact requirements of such a rule are not yet known, but such a rule could increase the amount of premiums the
 
 15
 
 Company must pay for FDIC insurance. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.


ITEM 1B.       UNRESOLVED STAFF COMMENTS
 
 Not applicable.
  ITEM 2.          PROPERTIES
 
 At December 31, 2009, the Bank conducted its business from the headquarters office in Newton, North Carolina, its Banco de la Gente administrative office and its 22 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, 2009.
 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



125-E Trade Court

Mooresville, NC 28117






16




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.











17





PART II




ITEM 4.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Peoples Bancorp common stock is traded on the over-the-counter (OTC) market and quoted on the Nasdaq Global Market, under the symbol “PEBK.”  Market makers for the Company’s shares include Scott and Stringfellow, Inc. and Sterne Agee & Leach.
 
 Although the payment of dividends by the Company is subject to certain requirements and limitations of North Carolina corporate law, 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 and repurchase shares may be dependent upon the Company’s receipt of dividends from the Bank.  The Bank’s ability to pay dividends is limited.  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).   Based on its current financial condition, the Bank does not expect that this provision will have any impact on the Bank’s ability to pay dividends.  Due to the Company’s participation in the CPP, the full dividend for the latest completed CPP dividend period must be declared and paid in full before dividends may be paid to common shareholders and UST approval is required for any increase in common dividends per share.
 
 As of March 17, 2010, the Company had 712 shareholders of record, not including the number of persons or entitieswhose stock is held in nominee or street name through various brokerage firms or banks.   The market price for the Company’s common stock was $5.47 on March 17, 2010.
 
 The following table presents certain market and dividend information for the last two fiscal years.  Over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark down or commission and may not necessarily represent actual transactions.
  Market and Dividend DataCash Dividend2009
Low Bid
High Bid
Per Common ShareFirst Quarter
$
4.81

10.00

0.10Second Quarter
$
5.00

7.46

0.07Third Quarter
$
5.93

7.00

0.07Fourth Quarter
$
3.95

6.84

0.02Cash Dividend2008
Low Bid

High Bid

Per ShareFirst Quarter
$
12.20

15.50

0.12Second Quarter
$
9.56

14.19

0.12Third Quarter
$
7.36

13.14

0.12Fourth Quarter
$
8.51

12.00

0.12
   18
  STOCK PERFORMANCE GRAPH
 
 The following graph compares the Company’s cumulative shareholder return on its Common Stock with a NASDAQ index and with a southeastern bank index.  The graph was prepared by SNL Securities, L.C., Charlottesville, Virginia, using data as of December 31, 2009.
 
 
 COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS
 Performance Report for
 Peoples Bancorp of North Carolina, Inc.
  
     19
   The information required by Item 201(d) concerning securities authorized for issuance under equity compensation plans is set forth in Item 11 hereof.
  ISSUER PURCHASES OF EQUITY SECURITIESTotalNumber ofSharesPurchased asPart of

Maximum NumberTotal




Publicly

of Shares that MayNumber of

Average

Announced

Yet Be PurchasedShares

Price Paid

Plans or

Under the Plans orPeriod

Purchased

per Share

Programs

Programs*January 1 - 31, 2009

-

$
-

-


-February 1 - 28, 2009

1,900


7.37

-


-March 1 - 31, 2009

1,100


5.18

-


-April 1 - 30, 2009

-


-

-


-May 1 - 31, 2009

2,530


6.51

-


-June 1 - 30, 2009

2,497


6.39

-


-July 1 - 31, 2009

2,260


6.12

-


-August 1 - 31, 2009

1,080


6.32

-


-September 1 - 30, 2009

1,140


6.53

-


-October 1 - 31, 2009

-


-

-


-November 1 - 30, 2009

2,450


5.72

-


-December 1 - 31, 2009

1,350


4.18

-


-Total

16,307
(1)
$
6.13

-(1) The Company purchased 16,307 shares on the open market in 2009 for its deferred compensation plan. All purchases were funded by participant contributions to the plan. The agreements with UST under the CPP program allow the Company to purchase its common stock pursuant to benefit plans.
  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, as amended in reliance on the exemption set forth in Section 4(2) thereof.
   ITEM 5.
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 6.
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-31 of the Annual Report, which section is included in this Form 10-K as Exhibit (13).
   ITEM 6A.
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-30 of the Annual Report, which section is included in this Form 10-K as Exhibit (13).
   ITEM 7.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  The consolidated financial statements of the Company and supplementary data set forth on pages A-32 through A-66 of the Annual Report are included in this Form 10-K as Exhibit (13).
  20
  ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE
  Not applicable.
  ITEM 8A.
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, 2009 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, 2009.  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, 2009.
    /s/ Tony W. Wolfe

/s/ A. Joseph LampronTony W. Wolfe

A. Joseph LampronChief Executive Officer

Chief Financial OfficerFebruary 25, 2010

February 25, 2010
  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 SEC that permit the Company to provide only management’s report in this annual report.
   ITEM 8B.
OTHER INFORMATION
  None
  21
 
 PART III
  ITEM 9.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
 The information required by this Item regarding directors and executive officers of the Company is set forth under the sections captioned “Nominees”, “Directors Continuing in Office”, “Our Board of Directors and Its Committees”; “Executive Committee”, “Governance Committee”, “Audit Committee”, “Compensation Committee”, “Board Leadership and Structure and Risk Oversight” 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 “Audit Committee” 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.  These documents are available on the Bank’s website (www.peoplesbanknc.com) under “Investor Relations.”
  ITEM 10.
EXECUTIVE COMPENSATION
 
 The information required by this Item is set forth under the sections captioned “Executive Compensation and Benefits” contained in the Proxy Statement, which sections are incorporated herein by reference.
  ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
  The following table presents the number of shares of Company common stock to be issued upon the exercise of outstanding options, warrants and rights; the weighted-average price of the outstanding options, warrants and rights and the number of options, warrants and rights remaining that may be issued under the Company’s Omnibus Plan described under the section captioned “Omnibus Stock Option and Long Term Incentive Plan” contained in the Proxy Statement .
   22
   Plan Category

Number of securities to

be issued upon exercise

of outstanding option,

warrants and rights (1),

(2)

Weighted-average

exercise price of

outstanding options,

warrants and rights

(3)

Number of securities remaining

available for future issuance under

equity compensation plans

(excluding securities reflected in

column (a)) (4)(a)

(b)

(c)Equity compensation plans

approved by security holders

176,212

$
8.04

360,000Equity compensation plans not

approved by security holders

-


-

-Total

176,212

$
8.04

360,000(1) Includes 176,212 stock options issued under the 1999 Omnibus Plan, which are fully vested as of December 31, 2009. Of the outstanding stock options, options to purchase a total of 19,391 options were granted on September 25, 2000; 63,544 options were granted on October 30, 2001; 7,510 options were granted on December 18, 2001; 72,966 options were granted on December 17, 2002; 3,630 options were granted on May 6, 2004; and 2,421 options were granted on December 16, 2004.(2) Includes 3,000 shares of restricted stock granted on September 20, 2007, 1,750 shares granted on March 20, 2008 and 2,000 shares granted on November 20, 2008 under the 1999 Omnibus Plan. These restricted stock grants cliff vest three years after issuance.(3) The exercise prices for the grants of stock options under the 1999 Omnibus Plan on September 25, 2000; October 30, 2001; December 18, 2001; December 17, 2002; May 6, 2004 and December 16, 2004 are: $6.99; $8.78; $8.10; $7.77; $10.31; and $10.57, respectively. All prices and shares have been adjusted for the 10% stock dividends paid March 16, 2005 and June 16, 2006 and the three-for-two stock split paid June 15, 2007. The exercise price used for the grants of restricted stock is $4.95, the closing price for the Company’s stock on December 31, 2009.(4) Reflects shares authorized under the February 19, 2009 Omnibus Stock Ownership and Long Term Incentive Plan. No shares have been issued under this plan as of December 31, 2009.
   ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 
 See the section captioned “Indebtedness of and Transactions with Management and Directors” contained in the Proxy Statement, which section is incorporated herein by reference.
  ITEM 13.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
  See the section captioned “Proposal 3 - Ratification of Selection of Independent Auditor” contained in the Proxy Statement, which section is incorporated herein by reference.
 
   23
   ITEM 14.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES14(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, 2009 and 2008(c)
Consolidated Statements of Earnings for the Years Ended December 31, 2009, 2008 and2007(d)
Consolidated Statements of Changes in Shareholders' Equity for the Years EndedDecember 31, 2009, 2008 and 2007(e)
Consolidated Statements of Comprehensive Income for the Years Ended December 31,2009, 2008 and 2007(f)
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008and 2007(g)
Notes to Consolidated Financial Statements14(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.14(a)3.

Exhibits
  Exhibit (3)(1)
Articles of Amendment dated December 19, 2008, regarding the Series A PreferredStock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with theSecurities and Exchange Commission on December 29, 2008Exhibit (3)(2)
Articles of Amendment dated February 26, 2010 filed herewithExhibit (3)(i)
Articles of Incorporation of Peoples Bancorp of North Carolina, Inc., incorporatedby reference to Exhibit (3)(i) to the Form 8-A filed with the Securities andExchange Commission on September 2, 1999Exhibit (3)(ii)
Amended and Restated Bylaws of Peoples Bancorp of North Carolina,Inc., filed herewithExhibit (4)
Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 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 Common Stock,incorporated by reference to Exhibit (4)(2) to the Form 8-K filed with the Securitiesand Exchange Commission on December 29, 2008
   24
   Exhibit (10)(1)
Letter Agreement dated December 23, 2008 between the Registrant and the UnitedStates Department of the Treasury, incorporated by reference to Exhibit (10)(1) tothe Form 8-K filed with the Securities and Exchange Commission on December 29,2008Exhibit (10)(a)(i)
Employment Letter Agreement dated December 23, 2008 between Peoples Bancorpof North Carolina, Inc. and Tony W. Wolfe, incorporated by reference to Exhibit(10)(a)(i) to the Form 8-K filed with the Securities and Exchange Commission onDecember 29, 2008Exhibit (10)(a)(ii)
Amendment to Employment Agreement between Peoples Bank and Tony W. Wolfedated December 18, 2008, incorporated by reference to Exhibit (10)(a)(ii) to theForm 8-K filed with the Securities and Exchange Commission on December 29,2008Exhibit (10)(a)(iii)
Amended and Restated Executive Salary Continuation Agreement between PeoplesBank and Tony W. Wolfe dated December 18, 2008, incorporated by reference toExhibit (10)(a)(iii) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(b)(i)
Employment Letter Agreement dated December 23, 2008 between Peoples Bancorpof North Carolina, Inc. and Joseph F. Beaman, Jr., incorporated by reference toExhibit (10)(b)(i) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(b)(ii)
Amendment to Employment Agreement between Peoples Bank and Joseph F.Beaman, Jr. dated December 18, 2008, incorporated by reference to Exhibit(10)(b)(ii) to the Form 8-K filed with the Securities and Exchange Commission onDecember 29, 2008Exhibit (10)(b)(iii)
Amended and Restated Executive Salary Continuation Agreement between PeoplesBank and Joseph F. Beaman, Jr. dated December 18, 2008, incorporated byreference to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities andExchange Commission on December 29, 2008Exhibit (10)(c)(i)
Employment Letter Agreement dated December 23, 2008 between Peoples Bancorpof North Carolina, Inc. and William D. Cable, Sr., incorporated by reference toExhibit (10)(c)(i) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(c)(ii)
Amendment to Employment Agreement between Peoples Bank and William D.Cable, Sr. dated December 18, 2008, incorporated by reference to Exhibit(10)(c)(ii) to the Form 8-K filed with the Securities and Exchange Commission onDecember 29, 2008Exhibit (10)(c)(iii)
Amended and Restated Executive Salary Continuation Agreement between PeoplesBank and William D. Cable, Sr. dated December 18, 2008, incorporated byreference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities andExchange Commission on December 29, 2008Exhibit (10)(d)(i)
Employment Letter Agreement dated December 23, 2008 between Peoples Bancorpof North Carolina, Inc. and Lance A. Sellers, incorporated by reference to Exhibit(10)(d)(i) to the Form 8-K filed with the Securities and Exchange Commission onDecember 29, 2008Exhibit (10)(d)(ii)
Amendment to Employment Agreement between Peoples Bank and Lance A.Sellers dated December 18, 2008, incorporated by reference to Exhibit (10)(d)(ii) tothe Form 8-K filed with the Securities  and Exchange Commission on December 29,2008
   25
   Exhibit (10)(d)(iii)
Amended and Restated Executive Salary Continuation Agreement between PeoplesBank and Lance A. Sellers dated December 18, 2008, incorporated by reference toExhibit (10)(d)(iii) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(e)
Peoples Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long TermIncentive Plan incorporated by reference to Exhibit (10)(f) to the Form 10-K filedwith the Securities and Exchange Commission on March 30, 2000Exhibit (10)(e)(i)
Amendment No. 1 to the Peoples Bancorp of North Carolina, Inc. Omnibus StockOwnership and Long Term Incentive Plan incorporated by reference to Exhibit(10)(e)(i) to the Form 10-K filed with the Securities and Exchange Commission onMarch 15, 2007Exhibit (10)(f)(i)
Employment Letter Agreement dated December 23, 2008 between Peoples Bancorpof North Carolina, Inc. and A. Joseph Lampron, incorporated by reference toExhibit (10)(f)(i) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(f)(ii)
Amendment to Employment Agreement between Peoples Bank and A. JosephLampron dated March 18, 2010 filed herewithExhibit (10)(f)(iii)
Amended and Restated Executive Salary Continuation Agreement between PeoplesBank and A. Joseph Lampron dated December 18, 2008, incorporated by referenceto Exhibit (10)(f)(iii) to the Form 8-K filed with the Securities and ExchangeCommission on December 29, 2008Exhibit (10)(g)
Peoples Bank Directors' and Officers' Deferral Plan, incorporated by reference toExhibit (10)(h) to the Form 10-K filed with the Securities and ExchangeCommission 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 and amongPeoples Bancorp of North Carolina, Inc., PEBK Capital Trust II and Bear, SternsSecurities Corp. incorporated by reference to Exhibit (10)(j) to the Form 10-Q filedwith the Securities and Exchange Commission on November 13, 2006Exhibit (10)(k)
Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of June28, 2006 incorporated by reference to Exhibit (10)(k) to the Form 10-Q filed withthe Securities and Exchange Commission on November 13, 2006Exhibit (10)(l)
Guarantee Agreement of Peoples Bancorp of North Carolina, Inc. dated as of June28, 2006 incorporated by reference to Exhibit (10)(l) to the Form 10-Q filed withthe Securities and Exchange Commission on November 13, 2006Exhibit (10)(m)
Indenture, dated as of June 28, 2006, by and between Peoples Bancorp of NorthCarolina, Inc. and LaSalle Bank National Association, as Trustee,
   26
   relating to Junior Subordinated Debt Securities Due September 15, 2036incorporated 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 Retirement Agreementbetween 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 BenjaminI. Zachary, incorporated by reference to Exhibit (10)(n) to the Form 8-K filed withthe Securities and Exchange Commission on December 29, 2008Exhibit (10)(o)
2009 Peoples Bancorp of North Carolina, Inc. Omnibus Stock Ownership and LongTerm Incentive Plan incorporated by reference to Exhibit (10)(o) to the Form 10-Kfiled with the Securities and Exchange Commission on March 20, 2009Exhibit (11)
Statement regarding computation of per share earningsExhibit (12)
Statement regarding computation of ratiosExhibit (13)
2009 Annual Report of Peoples Bancorp of North Carolina, Inc.Exhibit (14)
Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc.,incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securitiesand 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 the Sarbanes-Oxley Act of 2002Exhibit (31)(b)
Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit (32)
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002Exhibit (99)(a)
Certification of the Principal Executive Officer Pursuant to Section 111 of the EmergencyEconomic Stabilization Act of 2008Exhibit (99)(b)
Certification of the Principal Financial Officer Pursuant to Section 111 of the EmergencyEconomic Stabilization Act of 2008
     27
    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)/s/ Tony W. WolfeTony W. WolfePresident and Chief Executive OfficerDate:  March 24, 2010
   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 24, 2010Tony W. Wolfe

(Principal Executive Officer)/s/ James S. Abernethy

Director

March 24, 2010James S. Abernethy/s/ Robert C. Abernethy

Chairman of the Board and Director

March 24, 2010Robert C. Abernethy/s/ Douglas S. Howard

Director

March 24, 2010Douglas S. Howard/s/ A. Joseph Lampron

Executive Vice President and Chief

March 24, 2010A. Joseph Lampron

Financial Officer (Principal Financialand Principal Accounting Officer)/s/ John W. Lineberger, Jr.

Director

March 24, 2010John W. Lineberger, Jr./s/ Gary E. Matthews

Director

March 24, 2010Gary E. Matthews/s/ Billy L. Price, Jr., M.D.

Director

March 24, 2010Billy L. Price, Jr., M.D./s/ Larry E. Robinson

Director

March 24, 2010Larry E. Robinson/s/ William Gregory Terry

Director

March 24, 2010William Gregory Terry/s/ Dan Ray Timmerman, Sr.

Director

March 24, 2010Dan Ray Timmerman, Sr./s/ Benjamin I. Zachary

Director

March 24, 2010Benjamin I. Zachary
    28