Peoples Bancorp of North Carolina (PEBK) 8-K Financial statements and exhibits

EXHIBIT (99)(a)

NEWS RELEASE

July 19, 2004

Contact:         Tony W. Wolfe

     President and Chief Executive Officer

     A. Joseph Lampron

     Executive Vice President and Chief Financial Officer

     828-464-5620, Fax 828-465-6780

For Immediate Release

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS

Peoples Bancorp of NorthCarolina, Inc., the parent company of Peoples Bank, reported net income of $1.1 million, or $0.35 basic net income per share and $0.34 diluted net income per share, for the three months ended June 30, 2004 as compared to $91,200, or $0.03 basic and diluted net income per share, for the same period one year ago. Net income from recurring operations for the three months ended June 30, 2004 was $1.1 million, or $0.35 basic net income per share and $0.34 diluted net income per share, as compared to second quarter 2003 net income from recurring operations of $381,000, or $0.12 basic and diluted net income per share.

Tony W. Wolfe, President and Chief Executive Officer, attributed the increase in recurring second quarter earnings to a decrease in the provision for loan losses and an increase in net interest income, which were partially offset by a decrease in recurring non-interest income and an increase in non-interest expense.

The provision for loan losses for the three months ended June 30, 2004 was $868,000 as compared to $2.3 million for same period one year ago. This decrease is due to a decrease in non-performing assets of $5.9 million. Net interest income increased 7% to $5.8 million for the three months ended June 30, 2004 compared to $5.4 million for the same period one year ago. This increase is attributable to an increase in interest income due to an increase in the average outstanding balance of loans and investment securities available for sale combined with a reduction in interest expense resulting from a lower cost of funds. Net interest income after the provision for loan losses increased 57% to $5.0 million for the three months ended June 30, 2004 compared to $3.2 million for the same period one year ago.

Non-interest expense increased 17% to $4.9 million for the three months ended June 30, 2004, as compared to $4.2 million for the same period last year. The increase in non-interest expense included (1) an increase of $401,000 or 17% in salaries and benefits expense due to an increase in incentive expense and increased employee insurance costs, (2) an increase of $78,000 or 10% in occupancy expense due to an increase in lease expense resulting from lease agreements for branch facilities entered into during 2003, and (3) an increase of $219,000 or 22% in non-interest expenses other than salary, benefits and occupancy expenses. The increase in other non-interest expenses included an increase in consulting expense of $81,000 and an increase in advertising expense of $58,000.

Recurring non-interest income amounted to $1.5 million for the three months ended June 30, 2004, as

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PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS – PAGE TWO

compared to $1.6 million for the same period one year ago. The decease in recurring non-interest income is primarily due to a reduction in mortgage banking income resulting from less refinancing activity caused by higher interest rates.

Year-to-date net income as of June 30, 2004 was $2.3 million, or $0.72 basic net income per share and $0.71 diluted net income per share as compared to $1.5 million, or $0.48 basic and diluted net income per share, for the same period one year ago. Net income from recurring operations for the six months ended June 30, 2004 was $2.3 million, or $0.73 basic net income per share and $0.71 diluted net income per share, representing a 46% increase over net income from recurring operations of $1.6 million, or $0.50 basic net income per share and $0.49 diluted net income per share for the six months ended June 30, 2003. Net non-recurring losses on the disposition of assets for the six months ended June 30, 2003 amounted to $70,000, which were comprised of a $551,000 net loss on repossessed assets partially offset by a $479,000 gain associated with the sale of the Bank’s $3.7 million credit card portfolio during the first quarter of 2003. In the six months ended June 30, 2004 the Company had net non-recurring losses on the disposition of assets of $17,000.

The increase in the three months and year-to-date recurring earnings is primarily attributable to a decrease in the provision for loan losses and an increase in net interest income, which were partially offset by a decrease in recurring non-interest income and an increase in non-interest expense.

The year-to-date provision for loan losses decreased to $1.7 million for the six months ended June 30, 2004, as compared to $3.1 million for the six months ended June 30, 2003. The decrease in the provision for loan losses reflects a reduction in non-performing assets. Year-to-date net interest income increased 7% to $11.7 million for the six months ended June 30, 2004, as compared to $10.9 million for the same period one year ago. This increase is attributable to an increase in interest income due to an increase in the average outstanding balance of loans combined with a reduction in interest expense resulting from a decrease in the cost of funds. Year-to-date net interest income after the provision for loan losses increased 28% to $10.0 million for the six months ended June 30, 2004, as compared to $7.8 million for the same period one year ago.

Excluding non-recurring gains and losses on the disposition of assets, non-interest income decreased 2% to $3.1 million for the six months ended June 30, 2004 as compared to the same period last year. This decrease is primarily due to a decrease in mortgage banking income resulting from a reduction in refinancing activity due to increased interest rates. This decrease was partially offset by increases in service charges, resulting from an increase in account maintenance fees resulting from a growth in deposits, and miscellaneous non-interest income.

Non-interest expense increased 11% to $9.6 million for the six months ended June 30, 2004, as compared to $8.6 million for the same period last year. The increase in year-to-date non-interest expense included an increase of $618,000 or 13% in salaries and benefits expense primarily due to normal salary increases and increased incentive expense, an increase of $129,000 or 8% in occupancy expense, primarily due to an increase in lease expense resulting from lease agreements for branch facilities entered into during 2003, and an increase of $225,000 or 11% in non-interest expenses other than salary, benefits and occupancy expenses. The increase in other non-interest expenses included an increase in consulting expense of $163,000 and an increase in advertising expense of $50,000.

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PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS – PAGE THREE

Total assets as of June 30, 2004 amounted to $686.1 million, an increase of 3% compared to total assets of $665.0 million at June 30, 2003. This increase is primarily attributable to an increase in loans combined with an increase in available for sale securities.

Loans increased 2% to $546.6 million as of June 30, 2004 compared to $535.2 million as of June 30, 2003. Non-performing assets totaled $5.7 million at June 30, 2004 or 0.84% of total assets, compared to $11.7 million at June 30, 2003 or 1.75% of total assets. The allowance for loan losses at June 30, 2004 amounted to $9.2 million or 1.67% of total loans compared to $9.0 million or 1.69% of total loans at June 30, 2003.

Deposits amounted to $551.0 million as of June 30, 2004, representing an increase of 2% over deposits of $539.3 million at June 30, 2003. Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and certificates of deposits of denominations less than $100,000, increased $34.5 million to $398.7 million at June 30, 2004 as compared to $364.2 million at June 30, 2003. This increase is primarily due to an increase in the Bank’s retail checking products resulting from a retail marketing campaign started by the Bank in July 2003 designed to grow core deposits. Certificates of deposit in amounts greater than $100,000 or more totaled $152.3 million at June 30, 2004 as compared to $175.1 million at June 30, 2003.

Shareholders’ equity decreased to $48.1 million, or 7.02% of total assets, at June 30, 2004 as compared to $50.6 million, or 7.61% of total assets, at June 30, 2003. This was primarily due to a decrease in accumulated other comprehensive income resulting from a decrease in the market value of available for sale securities and derivative instruments.

Peoples Bank operates eleven offices throughout Catawba County, North Carolina, one office in Alexander County, North Carolina and three offices in Lincoln County, North Carolina. The Company’s common stock is publicly traded over the counter and is quoted on the Nasdaq National Market under the symbol “PEBK.” Scott and Stringfellow, Inc., Ryan, Beck & Co., Sterne Agee & Leach, Inc. and Trident Securities, Inc. are market makers for the Company’s shares.

(TABLES FOLLOW)

Statements made in this press release, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this release was 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. Fact ors that could cause actual results to differ materially include, but are not limited to, (1) competition in the markets served by Peoples 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, including but not limited to those described in Peoples Bancorp of North Carolina, Inc.’s annual report on Form 10-K for the year ended December 31, 2003.

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PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE FOUR
CONSOLIDATED BALANCE SHEETS
June 30, 2004, December 31, 2003 and June 30, 2003
		June 30, 2004			December 31, 2003			June 30, 2003
		(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	16,460,131		$	18,413,786		$	21,151,593
Federal funds sold		4,293,000			2,369,000			9,389,000
Cash and cash equivalents		20,753,131			20,782,786			30,540,593
Investment securities available for sale		91,828,182			79,460,452			73,457,013
Other investments		4,621,973			4,216,973			3,991,973
Total securities		96,450,155			83,677,425			77,448,986
Loans		546,596,277			552,126,189			535,185,738
Mortgage loans held for sale		2,929,920			587,495			6,026,760
Less: Allowance for loan losses		(9,153,088	)		(9,722,267	)		(9,033,342	)
Net loans		540,373,109			542,991,417			532,179,156
Premises and equipment, net		12,683,803			12,537,230			12,870,461
Accrued interest receivable and other assets		15,810,828			14,043,586			12,007,151
Total assets	$	686,071,026		$	674,032,444		$	665,046,347
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	75,433,797		$	72,420,923		$	76,511,443
NOW, MMDA & Savings		180,408,549			158,677,445			151,967,089
Time, $100,000 or more		152,285,659			171,596,789			175,140,673
Other time		142,900,246			147,107,075			135,684,594
Total deposits		551,028,251			549,802,232			539,303,799
Demand notes payable to U.S. Treasury		1,215,526			443,384			1,600,000
FHLB borrowings		67,500,000			58,000,000			58,000,000
Trust preferred securities		14,433,000			14,433,000			14,000,000
Accrued interest payable and other liabilities		3,745,709			2,799,932			1,516,597
Total liabilities		637,922,486			625,478,548			614,420,396
Shareholders' Equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued
and outstanding		-			-			-
Common stock, no par value; authorized
20,000,000 shares; issued and
outstanding 3,148,265 shares in 2004
and 3,135,202 shares in 2003		35,301,274			35,121,510			35,097,773
Retained earnings		14,480,780			12,844,524			12,976,941
Accumulated other comprehensive income		(1,633,514	)		587,862			2,551,237
Total shareholders' equity		48,148,540			48,553,896			50,625,951
Total liabilities and shareholders' equity	$	686,071,026		$	674,032,444		$	665,046,347
Memorandum:Letters of Credit	$	3,233,614		$	3,876,430		$	1,976,571

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE FIVE
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2004 and 2003
	Three months ended					Six months ended
	June 30,					June 30,
		2004		2003			2004		2003
		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	7,907,704	$	7,823,938		$	15,966,972	$	15,607,361
Interest on federal funds sold		6,787		27,168			9,427		44,097
Interest on investment securities:
U.S. Government agencies		668,074		548,989			1,282,084		1,184,115
States and political subdivisions		163,149		141,690			312,854		291,351
Other		95,395		108,830			196,987		217,797
Total interest income		8,841,109		8,650,615			17,768,324		17,344,721
INTEREST EXPENSE:
NOW, MMDA & Savings deposits		411,448		328,237			776,105		634,997
Time deposits		1,783,441		2,077,721			3,674,643		4,180,477
FHLB borrowings		643,017		641,982			1,288,824		1,301,923
Trust preferred securities		162,371		166,250			324,743		332,500
Other		1,487		1,446			3,159		3,682
Total interest expense		3,001,764		3,215,636			6,067,474		6,453,579
NET INTEREST INCOME		5,839,345		5,434,979			11,700,850		10,891,142
PROVISION FOR LOAN LOSSES		868,000		2,276,900			1,727,000		3,069,900
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		4,971,345		3,158,079			9,973,850		7,821,242
OTHER INCOME:
Service charges		881,111		818,928			1,684,355		1,591,079
Other service charges and fees		148,300		145,442			327,030		304,880
Mortgage banking income		90,159		213,751			170,005		404,108
Insurance and brokerage commission		97,964		102,230			256,203		199,192
Miscellaneous		318,801		(224,339	)		606,392		541,111
Total other income		1,536,335		1,056,012			3,043,985		3,040,370
OTHER EXPENSES:
Salaries and employee benefits		2,766,467		2,365,716			5,547,068		4,929,510
Occupancy		893,758		815,277			1,778,836		1,650,166
Other		1,213,193		993,998			2,267,053		2,042,248
Total other expenses		4,873,418		4,174,991			9,592,957		8,621,924
INCOME BEFORE INCOME TAXES		1,634,262		39,100			3,424,878		2,239,688
INCOME TAXES		547,000		(52,100	)		1,159,700		730,400
NET INCOME	$	1,087,262	$	91,200		$	2,265,178	$	1,509,288
PER SHARE AMOUNTS
Basic net income	$	0.35	$	0.03		$	0.72	$	0.48
Diluted net income	$	0.34	$	0.03		$	0.71	$	0.48
Cash dividends	$	0.10	$	0.10		$	0.20	$	0.20
Book value	$	15.29	$	16.16		$	15.29	$	16.16

PEOPLES BANCORP ANNOUNCES SECOND QUARTER EARNINGS RESULTS - PAGE SIX
FINANCIAL HIGHLIGHTS
For the three and six months ended June 30, 2004 and 2003
		Three months ended							Six months ended
		June 30,							June 30,
		2004			2003				2004			2003
		(Unaudited)			(Unaudited)				(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for Sale Securities	$	89,071,254		$	55,292,995			$	84,590,201		$	68,749,136
Loans		549,536,758			537,645,143				551,447,130			535,413,573
Earning Assets		647,297,485			622,428,954				644,328,763			617,758,875
Assets		680,374,972			658,083,592				677,112,978			654,151,843
Deposits		557,550,568			530,003,251				553,539,069			524,712,202
Shareholders' Equity		49,798,662			50,097,160				50,464,084			50,073,261
SELECTED KEY DATA:
Net Interest Margin (tax equivalent)		3.70%			3.55%				3.72%			3.60%
Return on Average Assets		0.64%			0.06%				0.67%			0.47%
Return on Average Shareholders' Equity		8.78%			0.73%				9.03%			6.08%
Shareholders' Equity to Total Assets (Period End)		7.02%			7.61%				7.02%			7.61%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	8,928,914		$	7,606,124			$	9,722,267		$	7,247,906
Provision for loan losses		868,000			2,276,900				1,727,000			3,069,900
Charge-offs		(696,322	)		(895,227	)			(2,418,702	)		(1,378,922	)
Recoveries		52,496			45,545				122,523			94,458
Balance, end of period	$	9,153,088		$	9,033,342			$	9,153,088		$	9,033,342
ASSET QUALITY:
Nonaccrual Loans								$	4,093,854		$	9,148,382
90 Days Past Due and still accruing									422,600			81,340
Other Real Estate Owned									1,228,841			1,715,936
Repossessed Assets									-			711,371
Total Nonperforming Assets								$	5,745,295		$	11,657,029
Nonperforming Assets to Total Assets									0.84%			1.75%
Allowance for Loan Losses to Nonperforming Assets									159.31%			77.49%
Allowance for Loan Losses to Total Loans									1.67%			1.69%
LOAN RISK GRADE ANALYSIS:					Percentage of Loans				General Reserve
					By Risk Grade				Percentage
					6/30/2004		6/30/2003		6/30/2004			6/30/2003
Risk 1 (Excellent Quality)					12.69%		9.70%		0.15%			0.15%
Risk 2 (High Quality)					22.94%		30.38%		0.50%			0.50%
Risk 3 (Good Quality)					53.43%		49.03%		1.00%			1.00%
Risk 4 (Management Attention)					5.56%		4.14%		2.50%			2.50%
Risk 5 (Watch)					1.09%		3.39%		7.00%			7.00%
Risk 6 (Substandard)					2.26%		1.51%		12.00%			12.00%
Risk 7 (Low Substandard)					1.27%		0.12%		25.00%			25.00%
Risk 8 (Doubtful)					0.00%		0.00%		50.00%			50.00%
Risk 9 (Loss)					0.00%		0.00%		100.00%			100.00%

At June 30, 2004 there were no relationships exceeding $1 million in the Watch risk grade, six relationships exceeding $1 million each (which totaled $10.1 million) in the Substandard risk grade and two relationships exceeding $1 million each (which totaled $6.7 million) in the Low Substandard risk grade. Balances of individual relationships exceeding $1 million in these risk grades ranged from $1.0 million to $3.9 million. These customers continue to meet payment requirements and these relationships would not become non-performing assets unless they are unable to meet those requirements.

(END)