The Devil ("Old Scratch") says that Deacon Peabody is damned, "or will be", if he doesn't look after his own sins instead of the sins of others.
A deacon is a title of somewhat ambiguous placement and authority, but it generally implies a member of the clergy (church authority) with fairly pedestrian duties, such as maintenance of church idols or the recitation of prayers. Thus, the hypocrisy implied here is that Peabody, being a low-ranking member of the church, nevertheless sees himself as a high moral authority, when in fact he has considerable problems of his own that he should be resolving before seeking out ways to correct others. This is perhaps a reference to a Bible passage that cautions against hypocrisy, telling believers "before you start trying to help people get specks of dirt out of their eyes, make sure you don't have a log in your own eye".
This point is further illustrated by the internally rotting tree that represents the deacon, suggesting that he is fundamentally flawed despite a healthy exterior.