Executive Summary / Key Takeaways

• Peoples Bancorp of North Carolina, Inc. ($PEBK) stands as a resilient community banking institution, demonstrating consistent net interest income growth and robust capital generation despite a dynamic interest rate environment.
• The company's core strategy emphasizes deep local market penetration and personalized service, complemented by its unique appraisal management subsidiary, CBRES, which significantly contributes to non-interest income and diversifies revenue streams.
• Recent financial performance highlights include a 7.96% increase in year-to-date net interest income to $43.7 million and a 0.81% rise in year-to-date net earnings to $13.2 million for the nine months ended September 30, 2025, alongside a strong liquidity position and "well capitalized" status.
• Key risks include geographic concentration within North Carolina, potential cyclicality in appraisal management fees, and intense deposit competition from larger regional banks, which could pressure funding costs.
• While not a technology-driven growth story, PEBK's operational execution, conservative credit stance, and strategic adaptability in its regional markets position it for continued moderate economic growth, as management anticipates.

A North Carolina Banking Anchor: Local Strength and Diversified Services

Peoples Bancorp of North Carolina, Inc. ($PEBK), established in 1912 and headquartered in Newton, North Carolina, has cultivated a century-long legacy as a community-oriented financial institution. Its foundational business model revolves around attracting deposits from the general public and strategically deploying these funds into a diversified loan portfolio, encompassing commercial, real estate mortgage, real estate construction, and consumer loans. This approach has cemented its role as a vital financial partner within the Catawba Valley region and surrounding North Carolina counties. The company's overarching strategy is to operate as a well-capitalized, profitable, and independent entity, deeply committed to serving the financial needs of its local communities.

The banking landscape in which PEBK operates is characterized by a mix of larger regional players and other community banks. Direct competitors such as Truist Financial Corporation , First Citizens BancShares, Inc. , United Community Banks, Inc. (UCBI), and Synovus Financial Corp. often possess greater scale and technological resources. For instance, Truist, a result of a major merger, boasts a broader national footprint and significant investments in digital banking tools. Similarly, Synovus Financial Corp. is known for incorporating more advanced technology in its operations. In contrast, PEBK's competitive edge is not primarily rooted in proprietary technological differentiation in the manner of a tech firm. Instead, its strength lies in its deep local brand, established network effects, and the ability to provide quick, effective, and personalized senior management responses to customer needs, a differentiator against larger, less agile competitors.

Beyond traditional banking, PEBK strategically diversifies its revenue through its wholly-owned subsidiary, Community Bank Real Estate Solutions, LLC (CBRES). This segment provides appraisal management services to other community banks, acting as a clearinghouse for these services. While not a "technology" in the conventional sense, CBRES represents a specialized service offering that leverages operational expertise to generate non-interest income. This diversification mitigates reliance solely on interest-based revenues and provides a unique value proposition within the community banking ecosystem. The appraisal management fee income from CBRES has shown robust growth, increasing by 17.17% for the three months ended September 30, 2025, and 22.48% for the nine months ended September 30, 2025, underscoring its growing importance to the company's financial profile.

The broader industry context, marked by Federal Reserve Federal Open Market Committee (FOMC) rate adjustments, has significantly influenced PEBK's operating environment. After a period of aggressive rate hikes (500 basis points between March 2022 and July 2023), the FOMC began reducing the target federal funds rate in 2024, reaching a range of 4% to 4.25% by September 30, 2025. These shifts directly impact the bank's net interest margin and cost of funds. Despite these macro-economic changes, PEBK has maintained a stable economic outlook in its local markets, anticipating continued moderate economic growth.

Financial Resilience Amidst Shifting Tides

Peoples Bancorp has demonstrated a resilient financial performance, particularly in its ability to grow net interest income despite a fluctuating interest rate environment. For the nine months ended September 30, 2025, net earnings rose to $13.2 million, or $2.41 per diluted share, an increase from $12.8 million, or $2.33 per diluted share, in the prior year period. This growth was primarily fueled by increases in net interest income and non-interest income, partially offset by higher provisions for credit losses and non-interest expenses. The annualized return on average assets stood at 1.05% for the nine-month period, a slight improvement from 1.04% a year ago, while the annualized return on average shareholders' equity was 12.52%.

Net interest income, the bedrock of PEBK's profitability, saw a substantial increase of $1.57 million for the three months ended September 30, 2025, reaching $15.1 million. This was driven by a $938,000 increase in interest income and a $632,000 decrease in interest expense. The rise in interest income was largely attributable to a $1.1 million increase in interest and fees on loans, reflecting growth in the total loan portfolio, and a $401,000 increase in interest income from balances due from banks due to higher outstanding balances. Conversely, interest expense declined as the FOMC's rate decreases led to lower rates paid on interest-bearing liabilities. The net interest margin improved to 3.58% for the three months ended September 30, 2025, up from 3.35% in the prior year period, signaling effective asset-liability management.

The loan portfolio expanded, with total loans reaching $1.18 billion as of September 30, 2025, compared to $1.14 billion at December 31, 2024. This growth, however, necessitated an increased provision for credit losses, which was $530,000 for the three months and $585,000 for the nine months ended September 30, 2025. This increase was primarily linked to higher reserves on construction loans and a $59.3 million increase in total loans year-over-year. Despite this, non-performing assets remained manageable at $5.1 million, representing 0.29% of total assets, indicating a conservative credit stance.

Deposits, a critical funding source, grew to $1.55 billion by September 30, 2025, from $1.48 billion at December 31, 2024. Core deposits, a stable and low-cost funding source, constituted 90% of total deposits, totaling $1.39 billion. The bank maintains a robust liquidity position, with a liquidity ratio of 30.14% at September 30, 2025, significantly exceeding its minimum required ratio of 10%.

Furthermore, PEBK is "well capitalized," boasting strong regulatory capital ratios, including a Tier 1 risk-based capital ratio of 14.70% and a total risk-based capital ratio of 15.58% at September 30, 2025. This strong capital base provides a buffer against potential economic downturns and supports future growth initiatives.

Strategic Focus and Future Trajectory

Peoples Bancorp's strategic trajectory is firmly rooted in its community banking model, focusing on organic growth within its established North Carolina markets and exploring expansion opportunities in contiguous areas. Management explicitly states that while growth by acquisition is considered, it is not deemed necessary for delivering a reasonable return to shareholders. This indicates a preference for disciplined, organic expansion that leverages existing strengths and market knowledge.

A notable strategic win for the company is the favorable September 2025 bench ruling in its litigation against the North Carolina Department of Transportation (NCDOT). This ruling mandates a total payment of $5.1 million for the eminent domain acquisition of the Bank's Mooresville branch, with an anticipated additional gain of $3.6 million upon receipt of the formal written order. This outcome not only provides a significant one-time financial boost but also resolves a long-standing operational issue.

The company's commitment to shareholder value is also evident in its capital management. In March 2025, the Board of Directors authorized a stock repurchase program of up to $3 million, though no shares had been repurchased under this program as of September 30, 2025. This program provides flexibility for capital deployment, potentially enhancing shareholder returns.

Looking ahead, management anticipates continued moderate economic growth in its local markets, noting that national and international economic uncertainties are less pronounced regionally. This qualitative guidance suggests a stable operating environment, allowing PEBK to focus on its core lending and deposit-gathering activities. The company's emphasis on fully amortizing residential mortgage loans and the use of interest rate floors on certain variable-rate loans further underscore a prudent approach to managing interest rate risk and maintaining asset quality.

Navigating the Headwinds: Key Risks and Challenges

Despite its strengths, Peoples Bancorp faces several pertinent risks and challenges that warrant investor attention. The company's operations are significantly influenced by local economic conditions, particularly given its geographic concentration within North Carolina. Any regional economic downturn could adversely impact the credit quality of its loan portfolio, potentially leading to increased loan losses. A substantial portion of the loan portfolio is collateralized by real estate, making its value inherently dependent on the stability of the real estate market. This exposure is particularly relevant for construction and land development loans, where risks include potential cost overruns or delays that could diminish collateral value.

Competition within the regional banking sector is intense. Larger competitors like Truist (TFC) and First Citizens BancShares (FCNCA), with their broader reach and deeper pockets, can exert pressure on funding costs, especially if they offer higher yields to attract and retain deposits. This deposit competition could compress PEBK's net interest margin. Furthermore, while the CBRES segment provides valuable non-interest income, its reliance on appraisal management fees introduces a degree of cyclicality, as its performance is tied to the broader real estate market activity in North Carolina.

From a technological standpoint, while PEBK excels in community-focused service, it may lag behind larger, more technologically advanced competitors like Synovus Financial Corp. (SNV) in digital banking innovation. This could pose a long-term challenge in attracting tech-savvy customers or achieving greater operational efficiencies through advanced digital platforms. The allowance for credit losses, while diligently managed, involves subjective judgments and estimates, meaning significant future additions could be necessary if economic conditions deteriorate, impacting future earnings.

Conclusion

Peoples Bancorp of North Carolina, Inc. presents a compelling investment narrative rooted in its enduring community banking model and strategic diversification. The company's ability to consistently grow net interest income, maintain a strong capital position, and effectively manage credit quality underscores its operational resilience in a dynamic financial landscape. The CBRES subsidiary serves as a valuable differentiator, contributing a growing stream of non-interest income and enhancing the company's overall revenue stability.

While PEBK may not boast cutting-edge technological moats, its competitive advantage is firmly established in its deep local relationships, personalized customer service, and conservative risk management. The anticipated gain from the NCDOT litigation and ongoing capital management initiatives further bolster its financial flexibility. Investors should recognize PEBK as a stable, well-managed regional bank poised for moderate, disciplined growth within its core markets, with its strong fundamentals and consistent performance offering a solid foundation for long-term value creation. The key to its continued success will be its ability to leverage its local strengths and operational efficiencies to counter competitive pressures and adapt to evolving market dynamics.