Peoples Bancorp's Resilient Growth Amidst Strategic Evolution (NASDAQ:PEBO) - PEBO Stock Research Report

## Executive Summary / Key Takeaways * Core NIM Expansion and Strategic Balance Sheet Management: Peoples Bancorp has demonstrated consistent core net interest margin (NIM) expansion for five consecutive quarters, driven by active management of funding costs and strategic adjustments to its investment portfolio, positioning the company for stability in varying interest rate environments. * Credit Quality Fortification and Leasing Portfolio Cleanup: The company is actively addressing elevated charge-offs in its small ticket leasing portfolio, strategically reducing exposure to high-balance accounts and anticipating a normalization of net charge-off rates to a historical 4-5% range by mid-2026, which is expected to positively impact future provision for credit losses. * Robust Loan Growth and Diversified Portfolio: PEBO achieved an 8% annualized loan growth in Q3 2025, with strong performance in commercial real estate and commercial and industrial loans, reflecting healthy demand across its diversified lending segments and supported by ongoing talent acquisition. * Strategic M&A Focus and Capital Strength: Peoples maintains a strong capital position, with improving tangible equity ratios, and is strategically patient in pursuing larger, transformative mergers and acquisitions to surpass the $10 billion asset threshold, prioritizing the "right deal" over speed. * Positive Operating Leverage and Stable Outlook: Management projects positive operating leverage for both 2025 and 2026, alongside mid-single-digit fee-based income growth and controlled non-interest expenses, signaling a confident outlook for sustained profitability and shareholder value. ## Setting the Scene: A Community Banking Powerhouse Adapts Peoples Bancorp Inc., founded in 1902 and headquartered in Marietta, Ohio, stands as a diversified financial services holding company deeply embedded in the communities it serves. Operating as a single reportable segment of community banking, Peoples offers a comprehensive suite of banking, leasing, insurance, investment, and trust solutions. Its extensive footprint spans 145 locations, including 127 full-service bank branches across Ohio, Kentucky, West Virginia, Virginia, Washington D.C., and Maryland. This broad regional presence, coupled with a century-long history, underpins its community-centric approach, a key differentiator in a competitive banking landscape. The company's overarching strategy is one of disciplined organic growth, meticulously balanced with a patient, opportunistic approach to strategic mergers and acquisitions. This dual strategy aims not only to expand its market presence but also to position the company to strategically cross the $10 billion asset threshold, a move management views as transformative for long-term value creation. This strategic patience is crucial, as the company prioritizes finding the "right deal" that aligns with its geographic and strategic objectives, rather than rushing into transactions. ### Technological Adoption for Service and Stability While Peoples Bancorp may not boast proprietary, cutting-edge technological inventions, its strategic adoption and utilization of modern banking technologies are fundamental to its service delivery and risk management framework. The company leverages interactive teller machines (ITMs), mobile banking, telephone, and internet-based banking to provide accessible and convenient services, serving as vital alternative channels to its traditional branch network. This focus on integrated service delivery enhances customer experience and operational efficiency, particularly in its community-focused markets. Crucially, Peoples employs sophisticated financial technologies for risk management, notably through its interest rate swap agreements. These instruments are a core component of its asset-liability management strategy, designed to mitigate interest rate risk. As of September 30, 2025, Peoples had five interest rate swap contracts with an aggregate notional value of $45 million, designated as cash flow hedges. These swaps function by allowing Peoples to receive variable rate amounts (tied to Term SOFR) in exchange for making fixed payments, effectively hedging interest payments on liabilities like 90-day brokered CDs or FHLB advances. This strategy has a tangible, quantifiable benefit: management projects that each 25 basis point reduction in Federal Reserve rates will result in only a nominal 1 to 2 basis point impact on net interest margin in 2025, and a 3 to 4 basis point decline for the full year in 2026, underscoring the effectiveness of its "relatively neutral" interest rate risk position. The company's ongoing investment in "data processing and software expense" due to "recent technology projects" further highlights its commitment to adapting and enhancing its operational technology systems. For investors, this strategic use of technology translates into greater balance sheet stability, controlled interest rate sensitivity, and enhanced operational efficiency, directly supporting the thesis of consistent financial performance and managed risk. ## Competitive Landscape and Strategic Positioning Peoples Bancorp operates in a dynamic financial services sector, contending with both larger regional banks and emerging indirect competitors. Direct rivals include established regional players such as Huntington Bancshares (TICKER:HBAN), Fifth Third Bancorp (TICKER:FITB), PNC Financial Services Group (TICKER:PNC), and KeyCorp (TICKER:KEY). These competitors often share overlapping geographic footprints and offer a similar array of commercial and consumer banking, lending, and insurance products. Peoples differentiates itself through a strong community brand and an extensive branch network, particularly valuable in underserved areas. This localized approach fosters deep customer relationships and loyalty, potentially leading to stable, recurring revenue from deposits and loans. For instance, while larger rivals like HBAN and FITB might pursue broader digital transformations, Peoples' emphasis on physical presence and personalized service can enhance its market share in community segments. However, Peoples' smaller scale compared to giants like PNC and KeyCorp can lead to higher operating costs and potentially slower digital innovation, impacting its ability to capture market share in digitally inclined segments. Its operational effectiveness in traditional services is strong, but it faces vulnerabilities from technological gaps that competitors like KeyCorp, with its focus on technology adoption, might exploit. Indirect competitors, including fintech companies PayPal (TICKER:PYPL) and Block (TICKER:SQ) and online banks Ally Financial (TICKER:ALLY), pose a threat by offering more accessible digital solutions and potentially cheaper transaction services. These alternatives could reduce Peoples' market share in retail banking and impact lending revenues. Peoples' strategy of encouraging its sales force to actively engage clients in deposit conversations, alongside its investment in technology projects, is a direct response to these competitive pressures, aiming to maintain customer relationships and enhance service delivery. The company's disciplined loan pricing and underwriting standards, consistent across quarters, also reflect its strategic positioning to maintain profitability amidst competitive pressures. ## Financial Performance and Operational Details Peoples Bancorp delivered a robust financial performance in the third quarter of 2025, building on its strategic initiatives. Net income for Q3 2025 totaled $29.48 million, translating to diluted earnings per common share of $0.83. This marked an improvement compared to the linked quarter's net income of $21.20 million and EPS of $0.59. For the first nine months of 2025, net income was $75.02 million, or $2.10 per diluted common share. Net interest income, the company's primary revenue driver, increased by $3.80 million (4%) to $91.35 million in Q3 2025 compared to the linked quarter, primarily due to higher loan balances and improved yields on investment securities. Year-over-year, net interest income for Q3 2025 rose by $2.40 million (3%) from Q3 2024, driven by growth in both loan and investment portfolios.

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The net interest margin (NIM) for Q3 2025 stood at 4.16%, a slight expansion from 4.15% in Q2 2025. Notably, excluding accretion income from acquisitions, the core net interest margin expanded by five basis points, marking the fifth consecutive quarter of core NIM expansion. Accretion income, however, continued its anticipated decline, contributing $1.70 million (8 basis points) to NIM in Q3 2025, down from $2.60 million (12 basis points) in Q2 2025 and $8.10 million (39 basis points) in Q3 2024, largely due to fewer loan payoffs and the diminishing impact of the Limestone Merger.

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The company's proactive approach to managing its investment portfolio was evident in Q3 2025, with a $2.70 million loss on the sale of lower-yielding available-for-sale securities. This strategic move was undertaken to increase future investment securities yields, with half of the proceeds reinvested into higher-yielding securities and the remainder used to pay down borrowings. Total investment securities stood at $1.97 billion at September 30, 2025, with held-to-maturity securities increasing by $157 million since December 31, 2024. Credit quality, a key focus, showed signs of stabilization and improvement. The provision for credit losses for Q3 2025 significantly declined to $7.30 million, a reduction of over $9 million from the $16.60 million recorded in Q2 2025. This provision was influenced by net charge-offs, loan growth, and a slight deterioration in economic forecasts, partially offset by reductions in reserves for individually analyzed loans and leases. The annualized net charge-off rate improved to 41 basis points in Q3 2025 from 43 basis points in Q2 2025, primarily due to lower small ticket lease charge-offs. Nonperforming assets (NPAs) also decreased from 0.49% of total assets at June 30, 2025, to 0.47% at September 30, 2025. While criticized loans increased by $23.90 million and classified loans by $33.60 million in Q3 2025 due to some loan downgrades, management views these as isolated issues, unrelated from an industry and geographic standpoint, with expectations for some credits to be paid off or upgraded in Q4 2025. Loan growth remained robust, with period-end total loan and lease balances increasing by $127.10 million (8% annualized) in Q3 2025. This growth was primarily fueled by increases of $121.20 million in other commercial real estate loans and $82.10 million in commercial and industrial loans, partially offset by a decrease of $80.30 million in construction loans as projects completed. The small ticket leasing portfolio, a source of elevated charge-offs, saw its high-balance accounts decline, with management ceasing new originations in mid-2024 to clean up the portfolio. The average FICO score for the auto portfolio remains strong at 746, with minimal subprime exposure. Deposit balances experienced a slight decrease of $5 million in Q3 2025 compared to the linked quarter, primarily due to a strategic reduction in brokered CDs ($25.90 million) and governmental deposits ($12.20 million), offset by increases in money market, interest-bearing demand, and non-interest-bearing deposits. This reflects a strategic shift towards lower-cost funding sources. Total stockholders' equity increased by $29.40 million in Q3 2025, driven by net income and a decrease in accumulated other comprehensive loss, leading to an improved tangible book value per common share of $22.05. Peoples' capital levels remain strong, exceeding well-capitalized thresholds, with risk-based capital ratios increasing due to loan growth.

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## Outlook and Strategic Initiatives Peoples Bancorp's management has provided clear guidance for the remainder of 2025 and preliminary insights into 2026, reflecting a confident and disciplined strategic roadmap. For the full year 2025, excluding noncore expenses, the company anticipates achieving positive operating leverage compared to 2024. This is supported by a projected full-year net interest margin of 4.2%, assuming two 25 basis point Federal Reserve rate reductions in the fourth quarter. The company's "relatively neutral" interest rate risk position is expected to minimize the impact of these rate changes on NIM. Fee-based income growth is projected in the mid-single-digit percentages compared to 2024, with total non-interest expense for Q2-Q4 2025 expected to be between $69 million and $71 million, demonstrating a focus on expense control. Loan growth for 2025 is guided between 4% and 6%, balancing robust demand with anticipated elevated payoff activity in the latter half of the year. The provision for credit losses is expected to normalize to levels similar to the 2024 quarterly run rate in the second half of 2025, contingent on stable economic forecasts and the continued resolution of the small ticket leasing portfolio. Looking ahead to 2026, preliminary guidance, also excluding noncore expenses, projects continued positive operating leverage. The net interest margin is anticipated to be around 4.2% for the full year, without factoring in any additional rate cuts. Each 25 basis point rate reduction from the Federal Reserve is estimated to result in a 3 to 4 basis point decline in NIM for the full year, reinforcing the company's neutral rate sensitivity. Quarterly fee-based income is expected to range between $27 million and $29 million, with Q1 typically elevated due to annual performance-based insurance commissions. Quarterly non-interest expenses are projected between $71 million and $73 million, with Q1 2026 being higher due to annual expenses. Loan growth for 2026 is expected to moderate slightly to between 3% and 5% compared to 2025, influenced by accelerating paydown activity in a falling rate environment and potential softening in certain consumer and multifamily segments. A reduction in net charge-offs for 2026 compared to 2025 is also anticipated, which is expected to positively impact the provision for credit losses, assuming no changes in economic forecasts. Strategically, Peoples remains committed to organic growth and talent acquisition across its core markets, which is a tailwind for loan production. The company continues its patient pursuit of strategic mergers and acquisitions, with a preference for larger deals that could facilitate surpassing the $10 billion asset threshold and expanding within existing or adjacent markets like Virginia, Southern Indiana, or Southwest Pennsylvania. This disciplined M&A approach, coupled with active balance sheet management (including optimizing the investment portfolio and managing funding costs), underscores Peoples' commitment to long-term value creation. ## Risks and Challenges Despite a positive outlook, Peoples Bancorp faces several inherent risks. Interest Rate Risk (IRR) remains a significant concern, as fluctuations in market rates can impact net interest income and the economic value of equity. While the company's asset-liability management (ALCO) committee actively manages this risk, unexpected non-parallel shifts in the yield curve or changes in deposit repricing assumptions could still affect financial performance. Credit risk, particularly within the loan portfolio, is another key area of focus. Although overall credit quality is strong, the small ticket leasing portfolio has experienced elevated charge-offs, requiring aggressive management and provisioning. While management anticipates a normalization of these charge-offs, a longer-than-expected tail on this portfolio or a deterioration in economic conditions could impact future credit losses. Loan concentrations, especially in commercial real estate, also present a risk, as decreases in real estate values could adversely affect collateral values and recovery rates. The increase in criticized and classified loans in Q3 2025, though deemed isolated, highlights the ongoing need for vigilant credit monitoring. Broader economic conditions, including persistent inflation, supply chain issues, and labor shortages, could impact borrowers' liquidity and ability to repay loans. Geopolitical events and changes in trade regulations, such as tariffs, introduce uncertainty, although their direct impact on Peoples' clients has been nominal thus far. Competitive pressures from larger regional banks and fintechs necessitate continuous investment in technology and service differentiation to maintain market share and profitability. Regulatory changes and increased scrutiny, particularly for banks approaching the $10 billion asset threshold, could also lead to higher compliance costs and operational complexities. ## Conclusion Peoples Bancorp Inc. is a resilient community banking institution demonstrating a clear strategic vision for growth and profitability. Its consistent core net interest margin expansion, disciplined management of funding costs, and proactive approach to optimizing its investment portfolio underscore a robust financial foundation. The ongoing, systematic cleanup of the small ticket leasing portfolio, coupled with strong organic loan growth across diversified segments, signals a commitment to fortifying credit quality and expanding its core business. The company's strategic patience in pursuing transformative mergers and acquisitions, alongside its strong capital position, positions it favorably for future expansion beyond the $10 billion asset mark. While external economic uncertainties and competitive pressures persist, Peoples' strategic adoption of technology for both service delivery and risk management, combined with its deep community ties, provides a durable competitive advantage. For discerning investors, Peoples Bancorp presents a compelling narrative of a well-managed regional bank poised for sustained performance and shareholder value creation through strategic execution and a focus on its foundational strengths.