10-Q: Peoples Bancorp Q3 Earnings Dip Amid Rising Costs, Legal Win Boosts Outlook

Peoples Bancorp reported a slight decrease in Q3 net earnings but saw year-to-date growth, driven by increased net interest income and a significant legal settlement.

Summary

• Net earnings for the three months ended September 30, 2025, decreased to $3.7 million ($0.70 basic EPS) from $4.0 million ($0.74 basic EPS) in the prior year period.
• Year-to-date net earnings for the nine months ended September 30, 2025, increased to $13.2 million ($2.49 basic EPS) from $12.8 million ($2.41 basic EPS) in the prior year period.
• Net interest income for Q3 2025 rose to $15.1 million from $13.5 million in Q3 2024, and year-to-date increased to $43.7 million from $40.3 million.
• Total assets grew to $1.74 billion at September 30, 2025, from $1.65 billion at December 31, 2024.
• Total deposits increased to $1.55 billion at September 30, 2025, from $1.48 billion at December 31, 2024.
• Total loans increased to $1.18 billion at September 30, 2025, from $1.14 billion at December 31, 2024.
• Shareholders' equity significantly increased to $149.5 million at September 30, 2025, from $130.6 million at December 31, 2024, primarily due to a decrease in unrealized losses on investment securities available for sale.
• A September 2025 bench ruling awarded the Bank $5.1 million from the NCDOT for an eminent domain acquisition, with an expected additional gain of $3.6 million.

Sentiment

Score: 7

Explanation: While Q3 net earnings saw a slight dip due to increased provisions and expenses, the year-to-date performance shows growth. The significant legal win and strong capital/liquidity positions provide a positive outlook, offsetting some of the increased operational costs and credit loss provisions. The overall financial health and strategic positioning appear solid.

Positives

• Year-to-date net earnings increased to $13.2 million, up from $12.8 million in the prior year.
• Net interest income showed strong growth, increasing by $1.6 million for Q3 and $3.4 million year-to-date.
• Total assets grew by $86.4 million to $1.74 billion since December 31, 2024.
• Total deposits increased by $68.2 million to $1.55 billion, with core deposits representing 90% of total deposits.
• Net loans increased by $44.8 million to $1.17 billion since December 31, 2024.
• Shareholders' equity significantly improved by $18.9 million to $149.5 million, driven by a reduction in accumulated other comprehensive loss.
• Accumulated other comprehensive loss improved by $9.8 million, from $(39.16) million at December 31, 2024, to $(29.35) million at September 30, 2025.
• The Bank received a favorable bench ruling in September 2025, awarding $5.1 million from the NCDOT for an eminent domain acquisition, with an expected additional gain of $3.6 million.
• All capital ratios (Tier 1, Total Risk-Based, Common Equity Tier 1, and Leverage) remain well above 'well capitalized' thresholds.
• Liquidity ratio increased to 30.14% from 28.16%, well above the 10% minimum required by policy.
• Appraisal management fee income increased by $528,000 for Q3 and $1.9 million year-to-date due to higher appraisal volume.

Negatives

• Net earnings for the three months ended September 30, 2025, decreased to $3.7 million from $4.0 million in the prior year period.
• Basic and diluted earnings per share for Q3 2025 decreased compared to Q3 2024.
• Provision for credit losses increased significantly to $530,000 for Q3 2025 (from $297,000 in Q3 2024) and to $585,000 year-to-date (from a recovery of $80,000 in 2024).
• Non-interest expense increased by $1.9 million for Q3 and $2.7 million year-to-date, primarily due to higher professional fees (legal fees), salaries and employee benefits, debit card expense, and appraisal management fee expense.
• Miscellaneous non-interest income decreased by $410,000 for Q3 and $1.2 million year-to-date, mainly due to lower income from small business investment company (SBIC) investments.
• Non-accrual loans increased to $5.113 million at September 30, 2025, from $4.440 million at December 31, 2024.
• Collateral dependent loans increased to $5.113 million at September 30, 2025, from $4.431 million at December 31, 2024.
• Investment securities available for sale decreased by $11.1 million to $376.9 million.
• Unrealized losses on investment securities available for sale totaled $38.4 million at September 30, 2025.

Risks

• Competition in the markets served by the registrant and its subsidiaries.
• Changes in the interest rate environment.
• General national, regional or local economic conditions may be less favorable than expected, resulting in a deterioration in credit quality and the possible impairment of collectibility of loans.
• Legislative or regulatory changes, including changes in accounting standards.
• Significant changes in the federal and state legal and regulatory environments and tax laws.
• The impact of changes in monetary and fiscal policies, laws, rules and regulations.
• Credit risk in the loan portfolio, particularly for construction and land development, single-family residential, commercial real estate, commercial, and multifamily and farmland loans, due to dependence on real estate values and borrower business operations.
• The process for determining the allowance for credit losses includes subjective elements and is susceptible to significant change, potentially requiring significant future additions.
• Regulatory agencies may require adjustments to the allowance for credit losses based on their judgments during examinations.

Future Outlook

Management expects continued moderate economic growth in its local markets, despite national and international market uncertainties. The company aims to achieve growth in local markets and through expansion opportunities in contiguous or nearby markets, while maintaining high balance sheet liquidity, managing interest rate exposures, and actively monitoring asset quality.

Management Comments

• Our business emphasis has been and continues to be to operate as a well-capitalized, profitable and independent community-oriented financial institution dedicated to providing quality customer service.
• We are committed to meeting the financial needs of the communities in which we operate.
• We expect growth to be achieved in our local markets and through expansion opportunities in contiguous or nearby markets.
• We believe that we can be more effective in serving our customers than many of our non-local competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries.
• Our ability to provide these services is enhanced by the stability and experience of our Bank officers and managers.

Industry Context

The banking industry is currently navigating a changing interest rate environment, with the Federal Open Market Committee (FOMC) having reduced the target federal funds rate to a range of 4.00% to 4.25% by September 30, 2025. This has led to decreased interest expense for banks but also lower yields on variable rate securities. Peoples Bancorp's performance reflects these trends, with a decrease in interest expense on liabilities and a decrease in interest income on investment securities. The company notes that while national and international markets show uncertainty, its local markets continue to experience moderate economic growth, which is a positive differentiator for community banks focused on regional economies.

Comparison to Industry Standards

• The company's capital ratios (Tier 1 at 14.83%, Total Risk-Based at 15.70%, Common Equity Tier 1 at 13.68%, and Leverage at 11.07%) are all significantly above the 'well capitalized' thresholds set by Basel III capital standards (e.g., 8.0% Tier 1, 10.5% Total Risk-Based, 6.5% Common Equity Tier 1, 5.0% Leverage), indicating a strong capital position compared to regulatory benchmarks.
• The annualized return on average assets of 1.05% for the nine months ended September 30, 2025, is generally considered a healthy return for a community bank, often benchmarked against 1% or higher.
• The liquidity ratio of 30.14% is well above the Bank's internal policy minimum of 10%, suggesting robust liquidity management compared to internal standards.
• The non-performing assets to total assets ratio of 0.29% is relatively low, indicating good asset quality compared to industry averages, which can often range from 0.5% to 1.5% or higher during challenging economic periods.

Corporate Governance

Legal Proceedings

• A September 2025 bench ruling in the Bank's favor requires the North Carolina Department of Transportation (NCDOT) to pay a total of $5.1 million for the eminent domain acquisition of the Bank's Mooresville branch office, including a $1.5 million payment received in 2023.
• The Bank expects to realize an additional $3.6 million gain on the involuntary disposal of this property upon receiving the formal written order from the court.
• The Bank recorded $553,000 in legal expenses associated with these legal proceedings as of September 30, 2025.

Stakeholder Impact

• Shareholders: Potential for increased earnings from the NCDOT settlement, continued dividends ($0.20 per share for Q3), and potential for future stock repurchases. Strong capital ratios provide stability.
• Customers: Continued focus on community-oriented financial services and meeting local financial needs.
• Employees: Salaries and employee benefits expense increased, indicating ongoing investment in human capital.
• Regulatory Bodies: The Bank maintains capital ratios well above regulatory requirements, indicating strong compliance and financial health.

Next Steps

• Receive the formal written order for the NCDOT legal ruling to realize the additional $3.6 million gain.
• Management will continue to monitor and adjust the allowance for credit losses based on economic conditions and loan portfolio quality.
• Management will continue to evaluate market conditions and other factors for potential common stock repurchases under the authorized $3.0 million program.
• Continue to implement strategies to improve balance sheet positioning and/or earnings, and review interest rate sensitivity quarterly.
• Monitor the adoption of new accounting standards (ASU 2023-09, ASU 2024-03, ASU 2025-01) for their immaterial impact on disclosures.

Key Dates

Recommendation

While the year-to-date performance shows solid growth and the NCDOT legal settlement is a significant positive, the slight dip in Q3 net earnings, driven by increased provision for credit losses and higher non-interest expenses (including legal fees), suggests some near-term headwinds. The strong capital and liquidity positions provide a solid foundation, but the increase in non-accrual and collateral-dependent loans warrants continued monitoring. The stock repurchase program indicates management's confidence, but no shares have been repurchased under the new program yet. Given the mixed short-term results and the long-term stability, a 'hold' recommendation is appropriate for investors to observe how these factors evolve.

Keywords

Banking, Financial Services, Community Bank, North Carolina, SEC Filing, 10-Q, Earnings Report, Net Interest Income, Loan Portfolio, Credit Quality, Deposits, Shareholders Equity, Capital Ratios, Appraisal Management, Interest Rate Risk, Liquidity, NCDOT Litigation, Stock Repurchase