Peoples Bancorp Announces Third Quarter 2025 Results

Rhea-AI Summary

Peoples Bancorp (NASDAQ:PEBK) reported third quarter 2025 results on October 20, 2025. Q3 net earnings were $3.7 million or $0.70 per share (diluted $0.67), versus $4.0 million or $0.74 per share in Q3 2024. YTD net earnings were $13.2 million or $2.49 per share through September 30, 2025. Net interest margin improved to 3.58% (Q3) and 3.55% (YTD). Total loans were $1.18 billion and total deposits were $1.55 billion at September 30, 2025. Total assets rose to $1.74 billion and shareholders' equity increased to $149.5 million (8.60% of assets). A September 2025 bench ruling awarded the bank $5.1 million for an eminent domain property, with an expected additional $3.6 million gain after the formal written order.

Positive

• Shareholders' equity increased to $149.5M (+14.4% from $130.6M)
• Bench ruling award of $5.1M for eminent domain property with expected $3.6M additional gain
• Total assets rose to $1.74B (from $1.65B at 12/31/2024)

Negative

• Provision for credit losses expense of $585k YTD versus a $80k recovery prior year
• Non-interest expense increased to $47.3M YTD (from $44.7M), pressuring operating leverage

News Market Reaction

+5.88%

2 alerts

+5.88% News Effect

+$10M Valuation Impact

$175M Market Cap

0.7x Rel. Volume

On the day this news was published, PEBK gained 5.88%, reflecting a notable positive market reaction. Our momentum scanner triggered 2 alerts that day, indicating moderate trading interest and price volatility. This price movement added approximately $10M to the company's valuation, bringing the market cap to $175M at that time.

Data tracked by StockTitan Argus on the day of publication.

NEWTON, NC, NC / ACCESS Newswire / October 20, 2025 / Peoples Bancorp of North Carolina, Inc. (NASDAQ:PEBK) (the "Company"), the parent company of Peoples Bank (the "Bank"), reported third quarter 2025 results with highlights as follows:

Third quarter 2025 highlights:

• Net earnings were $3.7 million or $0.70 per share and $0.67 per diluted share for the three months ended September 30, 2025, as compared to $4.0 million or $0.74 per share and $0.72 per diluted share for the same period one year ago.

• Net interest margin was 3.58% for the three months ended September 30, 2025, compared to 3.35% for the three months ended September 30, 2024.

Year to date highlights:

• Net earnings were $13.2 million or $2.49 per share and $2.41 per diluted share for the nine months ended September 30, 2025, as compared to $12.8 million or $2.41 per share and $2.33 per diluted share for the same period one year ago.

• Cash dividends were $0.76 per share during the nine months ended September 30, 2025, compared to $0.73 per share for the prior year period.

• Total loans were $1.18 billion at September 30, 2025, compared to $1.14 billion at December 31, 2024.

• Non-performing assets were $5.1 million or 0.29% of total assets at September 30, 2025, compared to $4.8 million or 0.29% of total assets at December 31, 2024.

• Total deposits were $1.55 billion at September 30, 2025, compared to $1.48 billion at December 31, 2024.

• Core deposits, a non-GAAP measure, were $1.39 billion or 89.65% of total deposits at September 30, 2025, compared to $1.34 billion or 90.17% of total deposits at December 31, 2024.

• Net interest margin was 3.55% for the nine months ended September 30, 2025, compared to 3.34% for the nine months ended September 30, 2024.

Net earnings were $3.7 million or $0.70 per share and $0.67 per diluted share for the three months ended September 30, 2025, as compared to $4.0 million or $0.74 per share and $0.72 per diluted share for the prior year period. William D. Cable, Sr., President and Chief Executive Officer, attributed the decrease in third quarter net earnings to increases in the provision for credit losses and non-interest expense, which were partially offset by increases in net interest income and non-interest income, compared to the prior year period, as discussed below.

Net interest income was $15.1 million for the three months ended September 30, 2025, compared to $13.5 million for the three months ended September 30, 2024. The increase in net interest income is due to a $938,000 increase in interest income and a $632,000 decrease in interest expense. The increase in interest income is primarily due to a $1.1 million increase in interest income and fees on loans and a $401,000 increase in interest income on balances due from banks, which was partially offset by a $539,000 decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The increase in interest income on balances due from banks is primarily due to an increase in balances outstanding. The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the Federal Reserve. Net interest income after the provision for credit losses was $14.6 million for the three months ended September 30, 2025, compared to $13.3 million for the three months ended September 30, 2024. The provision for credit losses for the three months ended September 30, 2025 was $530,000, compared to $297,000 for the three months ended September 30, 2024. The increase in the provision for credit losses is primarily attributable to an increase in reserves on construction loans during the three months ended September 30, 2025, as compared to a reduction in reserves on construction loans during the three months ended September 30, 2024.

Non-interest income was $7.1 million for the three months ended September 30, 2025 and 2024. A $528,000 increase in appraisal management fee income due to an increase in appraisal volume was partially offset by a $411,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments and a $90,000 decrease in service charges and fees on deposits.

Non-interest expense was $16.9 million for the three months ended September 30, 2025, compared to $15.0 million for the three months ended September 30, 2024. The increase in non-interest expense is primarily attributable to a $1.2 million increase in other non-interest expense primarily due to increases in legal fees and debit card expense, a $492,000 increase in salaries and employee benefits expense primarily due to an increase in salary and insurance expense and a $422,000 increase in appraisal management fee expense due to an increase in appraisal volume, which were partially offset by a $168,000 decrease in occupancy expense primarily due to the $362,000 write-off of leasehold improvements for the Bank's former branch in Cary, North Carolina during the three months ended September 30, 2024.

Net earnings were $13.2 million or $2.49 per share and $2.41 per diluted share for the nine months ended September 30, 2025, as compared to $12.8 million or $2.41 per share and $2.33 per diluted share for the prior year period. The increase in year to date net earnings is primarily attributable to increases in net interest income and non-interest income, which were partially offset by increases in the provision for credit losses and non-interest expense, compared to the prior year period, as discussed below.

Net interest income was $43.7 million for the nine months ended September 30, 2025, compared to $40.3 million for the nine months ended September 30, 2024. The increase in net interest income is due to a $1.7 million increase in interest income and a $1.6 million decrease in interest expense. The increase in interest income is primarily due to a $3.0 million increase in interest income and fees on loans, which was partially offset by a $175,000 decrease in interest income on balances due from banks and a $1.1 million decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The decrease in interest income on balances due from banks is due to a reduction in balances outstanding and rate decreases implemented by the Federal Reserve. The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the Federal Reserve. Net interest income after the provision for credit losses was $43.1 million for the nine months ended September 30, 2025, compared to $40.3 million for the nine months ended September 30, 2024. The provision for credit losses for the nine months ended September 30, 2025 was an expense of $585,000, compared to a recovery of $80,000 for the nine months ended September 30, 2024. The increase in the provision for credit losses is primarily attributable to a $59.3 million increase in total loans from September 30, 2024 to September 30, 2025.

Non-interest income was $21.3 million for the nine months ended September 30, 2025, compared to $20.7 million for the nine months ended September 30, 2024. The increase in non-interest income is primarily attributable to a $1.9 million increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $1.2 million decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments.

Non-interest expense was $47.3 million for the nine months ended September 30, 2025, compared to $44.7 million for the nine months ended September 30, 2024. The increase in non-interest expense is primarily attributable to a $1.6 million increase in appraisal management fee expense due to an increase in appraisal volume, a $641,000 increase in salaries and employee benefits expense primarily due to an increase in salary expense and a $761,000 increase in other non-interest expense primarily due to increases in legal fees and debit card expense, which were partially offset by a $298,000 decrease in occupancy expense primarily due to the $362,000 write-off of leasehold improvements for the Bank's former branch in Cary, North Carolina during the three months ended September 30, 2024.

Income tax expense was $1.1 million for the three months ended September 30, 2025, compared to $1.4 million for the three months ended September 30, 2024. The effective tax rate was 22.95% for the three months ended September 30, 2025, compared to 25.76% for the three months ended September 30, 2024. The decrease in the effective tax rate for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 is primarily due to the revaluation of the deferred tax asset during the three months ended September 30, 2024 due to upcoming reductions in the North Carolina corporate income tax rate. Income tax expense was $3.9 million for the nine months ended September 30, 2025, compared to $3.5 million for the nine months ended September 30, 2024. The effective tax rate was 22.77% for the nine months ended September 30, 2025, compared to 21.71% for the nine months ended September 30, 2024. The increase in the effective tax rate is primarily due to a $322,000 interest receivable booked during the nine months ended September 30, 2024 on a deposit for taxes paid prior to a settlement with the North Carolina Department of Revenue ("NCDOR") to withdraw the disallowance of certain tax credits previously purchased by the Bank.

Total assets were $1.74 billion as of September 30, 2025, compared to $1.65 billion as of December 31, 2024. Available for sale securities were $376.9 million as of September 30, 2025, compared to $388.0 million as of December 31, 2024. Total loans were $1.18 billion as of September 30, 2025, compared to $1.14 billion at December 31, 2024.

Non-performing assets were $5.1 million or 0.29% of total assets at September 30, 2025, compared to $4.8 million or 0.29% of total assets at December 31, 2024. Non-performing assets comprise $4.1 million in residential mortgage loans and $1.0 million in commercial mortgage loans at September 30, 2025, compared to $3.7 million in residential mortgage loans, $463,000 in commercial mortgage loans, $257,000 in other loans, and $369,000 in other real estate owned at December 31, 2024.

The allowance for credit losses on loans was $10.2 million or 0.86% of total loans at September 30, 2025, compared to $10.0 million or 0.88% of total loans at December 31, 2024. The allowance for credit losses on loans increased $211,000 primarily due to a $45.0 million increase in total loans from December 31, 2024 to September 30, 2025. The allowance for credit losses on unfunded commitments was $1.2 million at September 30, 2025, compared to $1.1 million at December 31, 2024. The increase in the allowance for credit losses on unfunded commitments was due to a $7.8 million increase in unfunded loan commitments from December 31, 2024 to September 30, 2025. The allowance for credit losses on unfunded commitments is included in other liabilities on the Company's consolidated balance sheets. Management believes the current level of the allowance for credit losses is adequate; however, there is no guarantee that additional adjustments to the allowance will not be required because of changes in economic conditions, regulatory requirements or other factors.

Deposits were $1.55 billion as of September 30, 2025, compared to $1.48 billion as of December 31, 2024. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.39 billion at September 30, 2025, compared to $1.34 billion at December 31, 2024. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank's overall cost of funds and profitability. Certificates of deposit in amounts of more than $250,000 totaled $160.7 million at September 30, 2025, compared to $145.9 million December 31, 2024.

Junior subordinated debentures were $15.5 million at September 30, 2025 and December 31, 2024. Shareholders' equity was $149.5 million, or 8.60% of total assets, at September 30, 2025, compared to $130.6 million, or 7.90% of total assets, at December 31, 2024. The increase in shareholders' equity is primarily due to a decrease in the unrealized loss on investment securities available for sale due to rate changes between December 31, 2024 and September 30, 2025.

In 2023, the North Carolina Department of Transportation ("NCDOT") acquired the Bank's Mooresville branch property on NC Highway 150 in Mooresville, NC through an eminent domain acquisition for the widening of NC Highway 150. During the second quarter of 2023, the Bank received a $1.5 million payment for this property, which was booked as an offset to the net book value of the assets. The Bank recognized a $191,000 gain on this transaction during the second quarter of 2023. Following this action, the Bank spent considerable time and effort to increase monetary considerations for this property to more closely align with reasonable and fair property values. A September 2025 bench ruling in the Bank's favor stated that the NCDOT pay the Bank total of $5.1 million for this property, including the $1.5 million payment the Bank received in 2023. The formal written order for this ruling had not been received by the Bank as of September 30, 2025. The Bank recorded $553,000 in legal expenses associated with this settlement and a corresponding other payable for these fees as of September 30, 2025. The Bank expects to realize an additional $3.6 million gain on the involuntarily disposal of this property after receiving the formal written order for the September 2025 bench ruling.

Peoples Bank operates 15 banking offices in North Carolina, with offices in Catawba, Alexander, Lincoln, Mecklenburg and Iredell Counties. The Bank also operates loan production offices in Lincoln, Mecklenburg, Rowan and Forsyth Counties. The Company's common stock is publicly traded and is listed on the Nasdaq Global Market under the symbol "PEBK."

Statements made in this earnings 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 include, but are not limited to, (1) competition in the markets served by the 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2024.

Contact: William D. Cable, Sr.
President and Chief Executive Officer

Jeffrey N. Hooper
Executive Vice President and Chief Financial Officer

CONSOLIDATED BALANCE SHEETS
September 30, 2025, December 31, 2024 and September 30, 2024
(Dollars in thousands)
		September 30, 2025				December 31, 2024				September 30, 2024
		(Unaudited)				(Audited)				(Unaudited)
ASSETS:
Cash and due from banks		$	28,714			$	30,919			$	36,061
Interest-bearing deposits			88,302				28,347				37,101
Cash and cash equivalents			117,016				59,266				73,162
Investment securities available for sale			376,868				388,003				398,573
Other investments			2,621				2,728				2,753
Total securities			379,489				390,731				401,326
Mortgage loans held for sale			1,390				1,367				1,218
Loans			1,183,442				1,138,404				1,124,177
Less: Allowance for credit losses on loans			(10,206	)			(9,995	)			(10,616	)
Net loans			1,173,236				1,128,409				1,113,561
Premises and equipment, net			14,417				14,847				15,206
Cash surrender value of life insurance			17,710				17,675				18,482
Accrued interest receivable and other assets			35,078				39,667				38,695
Total assets		$	1,738,336			$	1,651,962			$	1,661,650
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand		$	410,802			$	402,254			$	408,766
Interest-bearing demand, MMDA & savings			779,939				741,363				728,142
Time, over $250,000			160,704				145,939				143,573
Other time			201,445				195,175				199,496
Total deposits			1,552,890				1,484,731				1,479,977
Securities sold under agreements to repurchase			-				-				8,429
Junior subordinated debentures			15,464				15,464				15,464
Accrued interest payable and other liabilities			20,515				21,204				21,498
Total liabilities			1,588,869				1,521,399				1,525,368
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
5,459,441 shares at 9/30/25, 5,457,646 shares
at 12/31/24, 5,457,646 at 9/30/24			48,708				48,658				48,678
Common stock held by deferred compensation trust,
at cost; 150,423 shares at 9/30/25, 158,580 shares
at 12/31/24, 158,905 shares at 9/30/24			(1,523	)			(1,757	)			(1,772	)
Deferred compensation			1,523				1,757				1,772
Retained earnings			130,105				121,062				118,542
Accumulated other comprehensive loss			(29,346	)			(39,157	)			(30,938	)
Total shareholders' equity			149,467				130,563				136,282
Total liabilities and shareholders' equity		$	1,738,336			$	1,651,962			$	1,661,650

CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2025 and 2024
(Dollars in thousands, except per share amounts)
			Three months ended								Nine months ended
			September 30,								September 30,
			2025				2024				2025				2024
			(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans			$	17,174			$	16,098			$	49,838			$	46,807
Interest on due from banks				1,009				608				2,065				2,240
U.S. Government sponsored enterprises				1,990				2,503				6,338				7,645
State and political subdivisions				694				695				2,082				2,085
Other				538				563				1,772				1,570
Total interest income				21,405				20,467				62,095				60,347
INTEREST EXPENSE:
Interest-bearing demand, MMDA & savings deposits				2,868				2,892				8,249				7,390
Time deposits				3,174				3,611				9,459				10,920
Junior subordinated debentures				244				283				727				850
Other				-				132				-				918
Total interest expense				6,286				6,918				18,435				20,078
NET INTEREST INCOME				15,119				13,549				43,660				40,269
PROVISION FOR CREDIT LOSSES				530				297				585				(80	)
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES				14,589				13,252				43,075				40,349
NON-INTEREST INCOME:
Service charges				1,404				1,515				4,188				4,201
Other service charges and fees				184				163				526				527
Gain/(loss) on sale of securities				-				5				(4	)			5
Mortgage banking income				149				138				217				263
Insurance and brokerage commissions				250				251				745				717
Appraisal management fee income				3,601				3,073				10,616				8,668
Miscellaneous				1,539				1,950				5,061				6,273
Total non-interest income				7,127				7,095				21,349				20,654
NON-INTEREST EXPENSES:
Salaries and employee benefits				7,094				6,602				21,050				20,409
Occupancy				2,278				2,446				6,364				6,662
Appraisal management fee expense				2,858				2,436				8,433				6,863
Other				4,694				3,532				11,490				10,729
Total non-interest expense				16,924				15,016				47,337				44,663
EARNINGS BEFORE INCOME TAXES				4,792				5,331				17,087				16,340
INCOME TAXES				1,100				1,373				3,890				3,546
NET EARNINGS			$	3,692			$	3,958			$	13,197			$	12,794
PER SHARE AMOUNTS
Basic net earnings			$	0.70			$	0.74			$	2.49			$	2.41
Diluted net earnings			$	0.67			$	0.72			$	2.41			$	2.33
Cash dividends			$	0.20			$	0.19			$	0.76			$	0.73
Book value			$	28.15			$	25.72			$	28.15			$	25.72

FINANCIAL HIGHLIGHTS
For the three and nine months ended September 30, 2025 and 2024, and the year ended December 31, 2024
(Dollars in thousands)
		Three months ended								Nine months ended								Year ended
		September 30,								September 30,								December 31,
		2025				2024				2025				2024				2024
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Audited)
SELECTED AVERAGE BALANCES:
Available for sale securities		$	411,583			$	440,519			$	420,159			$	443,023			$	442,097
Loans			1,170,760				1,120,545				1,156,515				1,107,344				1,113,488
Earning assets			1,676,108				1,609,727				1,642,637				1,608,843				1,611,816
Assets			1,718,077				1,653,202				1,683,667				1,650,348				1,653,356
Deposits			1,545,829				1,480,119				1,516,925				1,456,759				1,465,965
Shareholders' equity			142,490				127,465				140,882				125,751				129,866
SELECTED KEY DATA:
Net interest margin (tax equivalent) (1)			3.58	%			3.35	%			3.55	%			3.34	%			3.36	%
Return on average assets			0.85	%			0.95	%			1.05	%			1.04	%			0.99	%
Return on average shareholders' equity			10.28	%			12.35	%			12.52	%			13.59	%			12.59	%
Average shareholders' equity to total average assets			8.29	%			7.71	%			8.37	%			7.62	%			7.85	%
										September 30, 2025				September 30, 2024				December 31, 2024
										(Unaudited)				(Unaudited)				(Audited)
ALLOWANCE FOR CREDIT LOSSES:
Allowance for credit losses on loans										$	10,206			$	10,616			$	9,995
Allowance for credit losses on unfunded commitments											1,176				1,159				1,101
Provision for (recovery of) credit losses (2)											585				(80	)			(285	)
Charge-offs (2)											(533	)			(1,436	)			(1,981	)
Recoveries (2)											234				480				551
ASSET QUALITY:
Non-accrual loans										$	5,113			$	3,921			$	4,440
90 days past due and still accruing											-				-				-
Other real estate owned											-				-				369
Total non-performing assets										$	5,113			$	3,921			$	4,809
Non-performing assets to total assets											0.29	%			0.24	%			0.29	%
Allowance for credit losses on loans to non-performing assets											199.61	%			270.75	%			207.84	%
Allowance for credit losses on loans to total loans											0.86	%			0.94	%			0.88	%
LOAN RISK GRADE ANALYSIS:
Percentage of loans by risk grade
Risk Grade 1 (excellent quality)											0.30	%			0.27	%
Risk Grade 2 (high quality)											20.24	%			19.74	%
Risk Grade 3 (good quality)											71.60	%			72.74	%
Risk Grade 4 (management attention)											6.94	%			6.08	%
Risk Grade 5 (watch)											0.41	%			0.66	%
Risk Grade 6 (substandard)											0.51	%			0.51	%
Risk Grade 7 (doubtful)											0.00	%			0.00	%
Risk Grade 8 (loss)											0.00	%			0.00	%
At September 30, 2025, including non-accrual loans, there was one relationship exceeding $1.0 million in the Watch risk grade, which totaled $1.4 million; there were no relationships exceeding $1.0 million in the Substandard risk grade. At December 31, 2024, including non-accrual loans, there was one relationship exceeding $1.0 million in the Watch risk grade, which totaled $1.5 million; there were no relationships exceeding $1.0 million in the Substandard risk grade.
(1) This amount reflects the tax benefit that the Company receives related to its tax-exempt loans and securities, which carry interest rates lower than similar taxable investments due to their tax-exempt status. This amount has been computed using an effective tax rate of 22.78% and is reduced by the related nondeductible portion of interest expense.
(2) For the nine months ended September 30, 2025 and 2024 and the year ended December 31, 2024.

SOURCE: Peoples Bancorp of North Carolina, Inc.

View the original press release on ACCESS Newswire

FAQ

What were Peoples Bancorp (PEBK) Q3 2025 net earnings and EPS?

Q3 2025 net earnings were $3.7M or $0.70 per share (diluted $0.67).

How did Peoples Bancorp's net interest margin (NIM) change in Q3 2025?

Net interest margin was 3.58% for Q3 2025 (up from 3.35% in Q3 2024).

What is the status of the Mooresville eminent domain settlement for PEBK?

A September 2025 bench ruling awarded the bank $5.1M for the property; the bank expects an additional $3.6M gain after the formal written order.

How large were Peoples Bancorp's loans and deposits at September 30, 2025?

Total loans were $1.18B and total deposits were $1.55B at September 30, 2025.

Did Peoples Bancorp report material changes to allowance for credit losses at 9/30/2025?

The allowance for credit losses on loans was $10.2M (0.86% of loans) at September 30, 2025, modestly above $10.0M at 12/31/2024.

How did Peoples Bancorp's operating expenses affect 2025 results?

Non-interest expense increased to $47.3M YTD, contributing to higher operating costs versus prior year.