Executive Summary / Key Takeaways

• Peoples Bancorp of North Carolina (PEBK) demonstrates robust financial performance, driven by its core community banking operations and a strategically differentiated appraisal management services segment (CBRES). Net earnings for Q2 2025 rose to $5.2 million, or $0.97 per share, reflecting strong net interest income growth and significant non-interest income contributions.
• The company's net interest income is expanding due to increased loan volumes and effective interest rate management, even as the Federal Reserve adjusted rates. This highlights PEBK's ability to optimize its lending portfolio and manage funding costs in a dynamic economic environment.
• CBRES, PEBK's appraisal management subsidiary, stands out as a key operational differentiator, providing a high-growth, non-interest revenue stream. Its 24.89% revenue growth in Q2 2025, driven by increased appraisal volume, underscores its value in diversifying PEBK's income and enhancing profitability.
• PEBK maintains a strong capital position, with the Bank classified as "well capitalized" at June 30, 2025, and robust liquidity. This financial strength provides a solid foundation for organic growth in its local and contiguous markets, supported by a disciplined approach to capital allocation, including a new $3.0 million stock repurchase program.
• While operating in a competitive landscape dominated by larger regional players, PEBK leverages its deep local relationships and specialized service offerings, like CBRES, to carve out a resilient market position. Its focus on personalized service and community needs provides a distinct advantage against broader, less agile competitors.

A North Carolina Anchor: Peoples Bancorp's Enduring Model

Peoples Bancorp of North Carolina, Inc., founded 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, construction, and consumer loans. This core banking operation remains the bedrock of its profitability, primarily driven by net interest income.

The company's strategic responses to market dynamics are deeply rooted in its history. PEBK has consistently emphasized operating as a well-capitalized, profitable, and independent entity, committed to meeting the financial needs of its communities across Catawba, Lincoln, Alexander, Mecklenburg, Iredell, Wake, Rowan, and Forsyth counties. This localized approach fosters strong customer relationships, a critical competitive advantage in the often impersonal banking sector.

The broader banking industry has recently navigated significant interest rate volatility. The Federal Reserve's Federal Open Market Committee (FOMC) increased the target federal funds rate by 500 basis points between March 2022 and July 2023 to combat inflation, before reducing it to a range of 4.25% to 4.50% by June 30, 2025. PEBK has responded by actively managing its interest rate exposures and maintaining high levels of balance sheet liquidity, demonstrating resilience in a fluctuating economic landscape. This proactive management is crucial for mitigating risks and capitalizing on opportunities arising from these macroeconomic shifts.

The Engine of Growth: Dual-Segment Strength and Operational Edge

PEBK's operational structure is defined by two key segments: Banking Operations and Community Bank Real Estate Solutions, LLC (CBRES). The Banking Operations segment, representing the consolidated Bank excluding CBRES, generates its primary revenue from net interest income. This segment’s strength is evident in its ability to grow interest income and fees on loans, which increased by $1.1 million in Q2 2025 compared to the prior year, largely due to an increase in total loans.

The company's strategic focus on lending is yielding results, with average loans reaching $1.16 billion in Q2 2025, a $47.5 million increase from Q2 2024. This loan growth, coupled with a decrease in interest expense driven by lower rates paid on interest-bearing liabilities, propelled net interest income to $14.6 million for the three months ended June 30, 2025, up from $13.4 million in the prior year. This 8.96% increase in net interest income underscores the effectiveness of PEBK's core banking strategy.

Technological Differentiator: The CBRES Advantage

Beyond traditional banking, PEBK possesses a unique operational differentiator in CBRES, its wholly-owned subsidiary providing appraisal management services to other community banks. CBRES acts as a specialized clearinghouse, streamlining the complex and often time-consuming appraisal process for its clients. This service represents a significant technological and operational moat for PEBK, enabling it to generate substantial non-interest income.

The tangible benefits of CBRES are clearly quantifiable in its financial performance. For the three months ended June 30, 2025, CBRES reported appraisal management fee income of $3.97 million, a robust 24.89% increase from $3.18 million in Q2 2024. This growth was directly attributed to an "increase in appraisal volume," highlighting the scalability and demand for its specialized platform. The segment's net income also surged by 58.29% to $315,000 in Q2 2025, demonstrating strong operational leverage. For investors, CBRES provides a valuable diversification of revenue, reducing reliance solely on interest rate-sensitive banking operations and offering a high-growth, fee-based income stream that enhances overall profitability and market positioning.

Fortifying the Foundation: Capital, Liquidity, and Risk Management

PEBK's financial health is robust, characterized by strong capital and liquidity positions. Shareholders' equity increased to $144.0 million, or 8.5% of total assets, at June 30, 2025, up from $130.6 million (7.9% of total assets) at December 31, 2024. This increase was primarily driven by a decrease in the unrealized loss on investment securities available for sale, reflecting favorable rate changes.

The Bank maintains a "well capitalized" status, exceeding all regulatory minimums with a Tier 1 risk-based capital ratio of 14.79% and a total risk-based capital ratio of 15.65% at June 30, 2025. This strong capital base provides a buffer against economic downturns and supports future growth initiatives. Liquidity is also a priority, with core deposits forming the primary, stable funding source, representing 90% of total deposits at June 30, 2025. The Bank also maintains substantial access to wholesale funding through FHLB and FRB lines of credit, with $138.9 million and $540.0 million in remaining availability, respectively, at June 30, 2025.

Risk management is integral to PEBK's operations, particularly concerning its loan portfolio. While diversified, a substantial portion of loans are collateralized by real estate, exposing the company to market fluctuations. The allowance for credit losses (ACL) on loans stood at $9.8 million, or 0.85% of total loans, at June 30, 2025. Management employs a rigorous loan grading system and engages independent third-party reviews to monitor credit quality, ensuring the ACL adequately covers estimated losses. The company's proactive approach to managing credit risk is crucial for maintaining asset quality and investor confidence.

The Competitive Arena: Local Strength vs. Regional Giants

Peoples Bancorp operates in a competitive financial services landscape, facing both larger regional banks and emerging indirect competitors. Direct rivals like Truist Financial Corporation (TFC), Regions Financial Corporation (RF), and First Citizens BancShares, Inc. (FCNCA) possess significantly greater scale and broader geographic footprints. For instance, TFC, a large regional bank, benefits from an extensive branch network and diversified operations, often leading to stronger revenue growth and profitability margins compared to PEBK. Similarly, RF and FCNCA, with their broader regional presence and strategic growth through acquisitions, tend to exhibit higher operating margins and return on equity.

PEBK's competitive positioning, however, is not solely defined by scale. Its core strength lies in its deep community focus and personalized service, which can lead to superior customer loyalty and efficient operational execution in niche markets. While larger competitors may offer faster innovation in digital tools, PEBK's localized expertise and agility allow it to differentiate through tailored customer service. The CBRES segment further enhances this differentiation, providing a specialized service that larger, more generalized banks may not offer with the same focus or efficiency. This unique service acts as a competitive moat, attracting business from other community banks and diversifying PEBK's revenue streams beyond traditional lending.

Indirect competitors, including fintech companies and online banks, pose a different challenge by offering accessible digital solutions that could erode market share in deposits and lending. These players often provide notably easier-to-implement digital tools and potentially cheaper services. PEBK's strategic response involves maintaining high levels of balance sheet liquidity and actively monitoring asset quality, which are crucial for operational resilience in an evolving industry. While PEBK may lag in overall innovation speed and market share capture compared to its larger rivals, its focused strategy and specialized offerings allow it to maintain a resilient position within its chosen markets.

Outlook and Strategic Trajectory

Peoples Bancorp's outlook is grounded in its commitment to organic growth within its established and contiguous markets. Management anticipates continued growth, leveraging its community-oriented approach and strong customer relationships. The company's stance on acquisitions is pragmatic: while open to opportunities, it does not view them as essential for delivering reasonable shareholder returns, signaling a preference for disciplined, value-accretive expansion.

The economic environment appears to be stabilizing, with management noting that "economic conditions have stabilized such that businesses in our market area are growing and investing again." This stability provides a favorable backdrop for PEBK's lending activities and overall financial performance. However, potential risks remain, including changes in the interest rate environment, less favorable national or local economic conditions impacting credit quality, and ongoing legislative or regulatory changes. The inherent concentration of PEBK's loan portfolio in real estate also presents a continuous monitoring requirement, as its value is directly tied to the real estate market.

The continued success of the CBRES segment, driven by increasing appraisal volume, is expected to be a significant contributor to non-interest income. This diversification strategy, combined with prudent capital management, including the recently authorized $3.0 million stock repurchase program, positions PEBK for sustained profitability.

Conclusion

Peoples Bancorp of North Carolina stands as a resilient community banking institution, successfully leveraging its deep local roots and a distinctive operational advantage through its CBRES appraisal management services. The company's consistent financial performance, marked by growing net interest income from a robust loan portfolio and significant non-interest income contributions from CBRES, underscores its effective strategy in a dynamic banking landscape. PEBK's strong capital and liquidity, coupled with a disciplined approach to risk management, provide a solid foundation for continued organic growth.

While competing with larger regional banks, PEBK's commitment to personalized service and its specialized CBRES platform create a compelling niche. This dual-engine approach, combining traditional banking strength with a high-growth, fee-based service, forms the core of its investment thesis. Investors should recognize PEBK's ability to generate consistent returns and maintain a well-capitalized position, driven by its strategic focus and operational differentiators, even as it navigates broader industry trends and competitive pressures.