Peoples Bancorp of North Carolina (PEBK) 8-K Results of Operations and Financial Condition

EXHIBIT (99)(a)
NEWS RELEASE
		October 16, 2006
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 THIRD QUARTER EARNINGS RESULTS

Peoples Bancorp of North Carolina, Inc., the parent company of Peoples Bank, reported net income of $2.4 million, or $0.62 basic net income per share and $0.61 diluted net income per share, for the three months ended September 30, 2006 as compared to $1.8 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 three months ended September 30, 2006 was $2.5 million, or $0.65 basic net income per share and $0.64 diluted net income per share, as compared to third quarter 2005 net income from recurring operations of $2.0 million, or $0.51 basic and diluted net income per share. September 30, 2005 per share amounts have been restated to reflect the 10% stock dividend declared and distributed during the second quarter 2006.

Tony W. Wolfe, President and Chief Executive Officer, attributed the increase in third quarter earnings to growth in interest-earning assets, which contributed to growth in net interest income and non-interest income. In addition, the Company had a decrease in the provision for loan losses. The increases in net interest income and non-interest income and the decrease in the provision for loan losses were partially offset by an increase in non-interest expense.

Net interest income increased 16% to $8.5 million for the three months ended September 30, 2006 compared to $7.4 million for the same period one year ago. This increase is attributable to Federal Reserve interest rate increases, which resulted in increases to the prime rate. In addition, the average outstanding balances of loans and investment securities available for sale increased for the three months ended September 30, 2006. Net interest income after the provision for loan losses increased 22% to $7.9 million during the third quarter of 2006, compared to $6.5 million for the same period one year ago. The provision for loan losses for the three months ended September 30, 2006 was $686,000 as compared to $930,000 for the same period one year ago, primarily attributable to a decrease in non-accrual loans of $2.0 million when compared to September 30, 2005.

Recurring non-interest income increased 12% to $2.2 million for the three months ended September 30, 2006, as compared to $2.0 million for the same period one year ago. The increase in recurring non-interest income is primarily due to an increase in service charges and fees of $74,000 resulting from activity in new branches opened in 2004 and 2005 and an increase in miscellaneous other income of $229,000 primarily due to income amounting to $118,000 distributed by a Small Business Investment Corporation (SBIC) investment owned by the Bank. Net non-recurring losses of $161,000 for the three months ended September 30, 2006 included a $164,000 loss on the sale of securities partially offset by a gain on the disposition of assets.

Non-interest expense increased 15% to $6.2 million for the three months ended September 30, 2006, as compared to $5.4 million for the same period last year. The increase in non-interest expense included an increase of $336,000 or 11% in salaries and benefits expense due to normal salary increases and increased incentive expense, as well as an increase of $428,000 or 33% in other non-interest expenses. The increase in other non-interest expenses is attributable to an increase of $136,000 in consulting expense due to Sarbanes-Oxley related expenses, an increase of $148,000 in amortization of the issuance costs of the trust preferred securities issued in 2001 that management intends to call on December 31, 2006 and an increase of $53,000 in advertising expense.

5

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE TWO

Year-to-date net income as of September 30, 2006 was $7.3 million, or $1.92 basic net income per share and $1.87 diluted net income per share as compared to $4.7 million, or $1.24 basic net income per share and $1.23 diluted net income per share, for the same period one year ago. Net income from recurring operations for the nine months ended September 30, 2006 was $7.6 million or $2.00 basic net income per share and $1.95 diluted net income per share, representing a 57% increase over net income from recurring operations of $4.8 million, or $1.27 basic net income per share and $1.25 diluted net income per share for the nine months ended September 30, 2005.

The increase in year-to-date earnings is primarily attributable to growth in interest-earning assets, which contributed to increases in net interest income and non-interest income. In addition, the Company had a decrease in the provision for loan losses. The increases in net interest income and non-interest income and the decrease in the provision for loan losses were partially offset by an increase in non-interest expense.

Net interest income increased 24% to $25.1 million for the nine months ended September 30, 2006 compared to $20.3 million for the same period one year ago. This increase is attributable to an increase in interest income due to increases in the prime rate, which resulted from Federal Reserve interest rate increases. In addition, the average outstanding balances of loans and investment securities available for sale increased for the nine months ended September 30, 2006. Net interest income after the provision for loan losses increased 29% to $23.2 million for the nine months ended September 30, 2006, compared to $17.9 million for the same period one year ago. The provision for loan losses for the nine months ended September 30, 2006 was $1.9 million as compared to $2.3 million for the same period one year ago.

Recurring non-interest income increased 16% to $6.3 million for the nine months ended September 30, 2006, as compared to $5.4 million for the same period one year ago. The increase in recurring non-interest income is primarily due to an increase in service charges and fees of $507,000 resulting from activity in new branches opened in 2004 and 2005 and an increase in miscellaneous other income of $413,000 primarily due to a $154,000 increase in debit card fee income and income amounting to $118,000 distributed by a SBIC investment owned by the Bank. Net non-recurring losses of $311,000 for the nine months ended September 30, 2006 included a $337,000 loss on the sale of securities partially offset by a $26,000 gain on the disposition of assets.

Recurring non-interest expense increased 11% to $17.6 million for the nine months ended September 30, 2006, as compared to $15.9 million for the same period last year. The increase in recurring non-interest expense included an increase of $806,000 or 9% in salaries and benefits expense due to normal salary increases and increased incentive expense, as well as an increase of $819,000 or 21% in other non-interest expenses. The increase in other non-interest expenses is attributable to an increase of $178,000 in consulting expense due to Sarbanes-Oxley related expenses, an increase of $296,000 in amortization of the issuance costs of the trust preferred securities issued in 2001 that management intends to call on December 31, 2006 and an increase of $165,000 in debit card expense. The Company had non-recurring expenses of $178,000 for the nine months ended September 30, 2006 resulting from a prepayment fee associated with the early termination of a $5.0 million Federal Home Loan Bank advance during first quarter. This fee is included in other non-interest expense.

Total assets as of September 30, 2006 amounted to $795.0 million, an increase of 9% compared to total assets of $729.2 million at September 30, 2005. This increase is primarily attributable to an increase in loans combined with an increase in available for sale securities. Loans increased 11% to $624.3 million as of September 30, 2006 compared to $560.5 million as of September 30, 2005. Available for sale securities increased 7% to $118.1 million as of September 30, 2006 compared to $110.8 million as of September 30, 2005, the result of net securities purchases that are part of management’s objective to grow the investment portfolio. This increase in available for sale securities was partially offset by paydowns on mortgage-backed securities, calls and maturities.

6

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE THREE

Non-performing assets totaled $3.8 million at September 30, 2006 or 0.48% of total assets, compared to $5.9 million at September 30, 2005 or 0.81% of total assets. The allowance for loan losses at September 30, 2006 amounted to $8.1 million or 1.30% of total loans compared to $7.3 million or 1.31% of total loans at September 30, 2005.

Deposits amounted to $606.5 million as of September 30, 2006, representing an increase of 3% over deposits of $587.6 million at September 30, 2005. Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and certificates of deposits of denominations less than $100,000, increased $1.8 million to $430.9 million at September 30, 2006 as compared to $429.1 million at September 30, 2005 primarily due to an increase in certificates of deposit in amounts less than $100,000, which was partially offset by a decrease in non-interest bearing demand deposits. Certificates of deposit in amounts greater than $100,000 or more totaled $175.6 million at September 30, 2006 as compared to $158.5 million at September 30, 2005. This increase is due to an increase of $4.8 million in brokered deposits combined with an increase of $12.3 million in non-brokered deposits.

On June 28, 2006, the Company completed the issuance of $20 million PEBK Capital Trust II floating rate capital securities with a maturity date of June 28, 2036. The Company expects to use the net proceeds from this issuance to replace the trust preferred securities issued in 2001, which will be called at December 31, 2006.

Shareholders’ equity increased to $60.9 million, or 7.66% of total assets, at September 30, 2006 as compared to $54.1 million, or 7.42% of total assets, at September 30, 2005. The net increase in common stock and retained earnings from September 30, 2005 to September 30, 2006 amounted to $7.3 million primarily due to net income earned for the period, which was offset by a $555,000 decrease in accumulated other comprehensive income from September 30, 2005 to September 30, 2006. The decrease in accumulated other comprehensive income is due to a decrease in the market value of available for sale securities.

Peoples Bank operates entirely in North Carolina, with eleven offices throughout Catawba County, one office in Alexander County, three offices in Lincoln County, two offices in Mecklenburg County and one office in Union County. The Bank also operates a Loan Production Office in Davidson, North Carolina, which is located in Mecklenburg County. The Company’s common stock is publicly traded over the counter and is quoted on the Nasdaq National Market under the symbol “PEBK.”

(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. Factors 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, 2005.

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PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FOUR
CONSOLIDATED BALANCE SHEETS
September 30, 2006, December 31, 2005 and September 30, 2005
	September 30, 2006			December 31, 2005			September 30, 2005
		(Unaudited)						(Unaudited)
ASSETS:
Cash and due from banks	$	19,727,439		$	18,468,999		$	21,963,019
Federal funds sold		2,258,000			1,347,000			4,648,000
Cash and cash equivalents		21,985,439			19,815,999			26,611,019
Investment securities available for sale		118,084,586			115,158,184			110,805,224
Other investments		6,822,949			5,810,749			6,345,749
Total securities		124,907,535			120,968,933			117,150,973
Loans		624,302,284			566,663,416			560,470,788
Mortgage loans held for sale		1,289,217			2,247,900			4,170,230
Less: Allowance for loan losses		(8,132,844	)		(7,424,782	)		(7,334,831	)
Net loans		617,458,657			561,486,534			557,306,187
Premises and equipment, net		12,870,691			12,662,153			12,742,958
Cash surrender value of life insurance		6,466,938			6,311,757			6,257,365
Accrued interest receivable and other assets		11,311,108			9,034,239			9,120,965
Total assets	$	795,000,368		$	730,279,615		$	729,189,467
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand	$	98,155,787		$	94,660,721		$	98,623,830
NOW, MMDA & Savings		170,887,226			183,248,699			186,139,961
Time, $100,000 or more		175,609,612			152,410,976			158,488,890
Other time		161,831,432			152,533,265			144,306,091
Total deposits		606,484,057			582,853,661			587,558,772
Demand notes payable to U.S. Treasury		1,600,000			1,473,693			1,600,000
Securities sold under agreement to repurchase		8,602,041			981,050			438,325
FHLB borrowings		78,800,000			71,600,000			67,000,000
Junior subordinated debentures		35,052,000			14,433,000			14,433,000
Accrued interest payable and other liabilities		3,594,467			4,585,217			4,074,486
Total liabilities		734,132,565			675,926,621			675,104,583
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 3,813,807 shares in 2006
and 3,440,805 shares in 2005		50,674,267			41,096,500			41,178,332
Retained earnings		11,272,225			14,656,160			13,429,870
Accumulated other comprehensive income		(1,078,689	)		(1,399,666	)		(523,318	)
Total shareholders' equity		60,867,803			54,352,994			54,084,884
Total liabilities and shareholders' equity	$	795,000,368		$	730,279,615		$	729,189,467

 

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE FIVE
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2006 and 2005
	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
INTEREST INCOME:
Interest and fees on loans	$	13,302,338		$	10,156,112		$	37,373,713		$	27,838,237
Interest on federal funds sold		40,818			35,041			62,020			37,946
Interest on investment securities:
U.S. Government agencies		1,114,266			893,602			3,206,274			2,596,159
States and political subdivisions		201,248			181,479			587,409			543,974
Other		126,404			92,588			389,311			284,535
Total interest income		14,785,074			11,358,822			41,618,727			31,300,851
INTEREST EXPENSE:
NOW, MMDA & savings deposits		817,878			647,734			2,174,238			1,923,016
Time deposits		3,715,792			2,363,754			10,136,246			6,254,678
FHLB borrowings		909,702			722,818			2,763,657			2,144,602
Junior subordinated debentures		700,220			234,536			1,277,540			667,526
Other		99,234			8,763			183,077			19,874
Total interest expense		6,242,826			3,977,605			16,534,758			11,009,696
NET INTEREST INCOME		8,542,248			7,381,217			25,083,969			20,291,155
PROVISION FOR LOAN LOSSES		686,282			930,000			1,858,282			2,343,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		7,855,966			6,451,217			23,225,687			17,948,155
NON-INTEREST INCOME:
Service charges		976,515			988,294			2,918,390			2,740,863
Other service charges and fees		394,030			308,184			1,153,059			823,677
Gain (loss) on sale of securities		(163,702	)		(139,727	)		(337,453	)		(139,727	)
Mortgage banking income		115,802			133,543			355,678			338,299
Insurance and brokerage commission		80,523			87,006			294,206			299,526
Miscellaneous		639,683			410,802			1,605,443			1,192,298
Total non-interest income		2,042,851			1,788,102			5,989,323			5,254,936
NON-INTEREST EXPENSES:
Salaries and employee benefits		3,396,804			3,060,582			9,900,606			9,094,848
Occupancy		1,049,911			1,020,332			3,055,732			2,977,958
Other		1,735,065			1,306,732			4,871,334			3,874,376
Total non-interest expenses		6,181,780			5,387,646			17,827,672			15,947,182
INCOME BEFORE INCOME TAXES		3,717,037			2,851,673			11,387,338			7,255,909
INCOME TAXES		1,344,300			1,010,200			4,118,100			2,529,600
NET INCOME	$	2,372,737		$	1,841,473		$	7,269,238		$	4,726,309
PER SHARE AMOUNTS
Basic net income	$	0.62		$	0.48		$	1.92		$	1.24
Diluted net income	$	0.61		$	0.48		$	1.87		$	1.23
Cash dividends	$	0.11		$	0.09		$	0.32		$	0.27
Book value	$	15.96		$	14.28		$	15.96		$	14.28

PEOPLES BANCORP ANNOUNCES THIRD QUARTER EARNINGS RESULTS - PAGE SIX
FINANCIAL HIGHLIGHTS
For the three and nine months ended September 30, 2006 and 2005
	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
SELECTED AVERAGE BALANCES:
Available for sale securities	$	119,260,454		$	108,097,865		$	117,734,366		$	106,480,055
Loans		608,628,890			555,681,011			595,203,134			546,431,182
Earning assets		739,120,439			675,268,575			722,606,868			661,728,657
Assets		779,022,149			714,457,486			762,289,868			699,709,385
Deposits		605,544,233			576,723,351			598,891,616			565,242,875
Shareholders' equity		59,763,341			54,345,593			60,435,124			54,722,615
SELECTED KEY DATA:
Net interest margin (tax equivalent)		4.69%			4.43%			4.74%			4.19%
Return of average assets		1.21%			1.02%			1.27%			0.90%
Return on average shareholders' equity		15.75%			13.44%			16.08%			11.55%
Shareholders' equity to total assets (period end)		7.66%			7.42%			7.66%			7.42%
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period	$	7,922,419		$	8,021,456		$	7,424,782		$	8,048,627
Provision for loan losses		686,282			930,000			1,858,282			2,343,000
Charge-offs		(519,833	)		(1,729,069	)		(1,420,320	)		(3,410,070	)
Recoveries		43,976			112,444			270,100			353,274
Balance, end of period	$	8,132,844		$	7,334,831		$	8,132,844		$	7,334,831
ASSET QUALITY:
Non-accrual loans							$	3,149,424		$	5,104,281
90 days past due and still accruing								-			135,588
Other real estate owned								650,261			670,584
Repossessed assets								20,000			-
Total non-performing assets							$	3,819,685		$	5,910,453
Non-performing assets to total assets								0.48%			0.81%
Allowance for loan losses to non-performing assets								212.92%			124.10%
Allowance for loan losses to total loans								1.30%			1.31%

LOAN RISK GRADE ANALYSIS:	Percentage of Loans				General Reserve
	By Risk Grade*				Percentage
	9/30/2006		9/30/2005		9/30/2006		9/30/2005
Risk 1 (excellent quality)		12.37%		14.26%		0.15%		0.15%
Risk 2 (high quality)		16.17%		18.84%		0.50%		0.50%
Risk 3 (good quality)		58.61%		56.89%		1.00%		1.00%
Risk 4 (management attention)		10.29%		7.03%		2.50%		2.50%
Risk 5 (watch)		0.59%		0.58%		7.00%		7.00%
Risk 6 (substandard)		0.93%		0.88%		12.00%		12.00%
Risk 7 (low substandard)		0.53%		0.60%		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%
*Excludes non-accrual loans
At September 30, 2006 there were no relationships exceeding $1.0 million in the Watch risk grade, one relationship exceeding $1.0 million (which totaled $1.4 million) in the Substandard risk grade, and one relationship exceeding $1.0 million (which totaled $3.1 million) in the Low Substandard risk grade. These customers continue to meet payment requirements and these relationships would not become non-performing assets unless they are unable to meet those requirements.
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