Executive Summary / Key Takeaways

• Peoples Bancorp ($PEBO) is a diversified financial services company leveraging its community banking roots and strategic investments in specialty finance, insurance, and technology to drive growth and enhance efficiency.
• Recent financial performance in Q1 2025 reflects solid core earnings power, with core net interest margin expansion and fee income growth offsetting lower acquisition-related accretion income and seasonal expenses.
• Credit quality metrics showed improvement in Q1 2025, with declines in nonperforming assets and criticized/classified loans, although net charge-offs remain influenced by the small ticket leasing portfolio, which management expects to normalize.
• The company maintains a strong capital and liquidity position, supporting its strategic growth initiatives, including a focus on disciplined organic loan growth (4-6% target for 2025) and opportunistic M&A, particularly larger deals to surpass the $10 billion asset threshold.
• Investments in technology, including new CRM and loan origination systems, are aimed at enhancing operational efficiency, improving client service, and providing a competitive edge against rivals, contributing to the outlook for positive operating leverage in 2025.

Setting the Scene: A Diversified Community Bank in a Dynamic Landscape

Founded in 1902, Peoples Bancorp has evolved from a traditional bank into a diversified financial services holding company. Operating primarily across Ohio, Kentucky, West Virginia, Virginia, Washington D.C., and Maryland, with nationwide reach in specialty finance, PEBO offers a comprehensive suite of banking, trust, investment, insurance, premium financing, and equipment leasing solutions. This multi-faceted approach distinguishes PEBO within the regional banking sector, aiming to capture a broader share of client financial needs and diversify revenue streams beyond traditional spread income.

The competitive landscape for regional banks like PEBO is dynamic, marked by intense rivalry from larger regional players such as Fifth Third Bancorp (FITB) and KeyCorp (KEY), smaller community banks like Franklin Financial Services Corporation (FRAF), and increasingly, indirect competitors like fintech firms and online banks. Larger rivals often possess advantages in scale, broader geographic footprints, and significant technological investment capacity. For instance, while precise, directly comparable market share figures for all niche competitors are not publicly detailed, larger institutions like FITB and KEY leverage extensive networks and advanced digital platforms that can offer faster processing times and potentially lower costs for certain services, posing a challenge to PEBO's market positioning, particularly in urban areas. Smaller community banks like FRAF compete more directly on personalized service and local relationships, areas where PEBO also emphasizes its strengths, supported by its network of 147 locations, including 128 full-service branches.

PEBO's strategic response centers on leveraging its established community presence and brand loyalty while simultaneously investing in areas that enhance efficiency and expand capabilities. A key pillar of this strategy is technology. Over the past year, PEBO has made significant strides, rolling out a new Customer Relationship Management (CRM) system designed to integrate client information and opportunities across business lines, aiming to enhance cross-selling and client service. A new software system for insurance operations and increased utilization of Microsoft (MSFT) products are replacing legacy systems. Furthermore, a new business loan origination system is slated for implementation in 2025. While specific quantifiable metrics on the efficiency gains from these new systems are not yet available, the stated goals are clear: improve operational efficiency, cut internal service times (with some processes already reduced from hours to minutes), and provide a more integrated and seamless client experience. These investments are critical for PEBO to maintain competitiveness, address technological gaps relative to larger, more digitally advanced rivals, and support future growth. The company's focus on talent acquisition, particularly adding commercial bankers across its core footprint, further underscores its commitment to both organic growth and strengthening client relationships in competitive markets.

Broader industry trends, including the impact of Federal Reserve interest rate policies, persistent inflation, and shifts in consumer behavior, continue to shape the operating environment. While national consumer confidence has seen declines, PEBO has observed counterintuitive strength in certain consumer-facing businesses like indirect lending and mortgage origination, suggesting localized resilience or specific market dynamics at play. The commercial real estate market, particularly multifamily properties in PEBO's core metro areas, continues to show relative strength in rental growth compared to national averages, although higher interest rates are influencing paydown activity as stabilized projects are valued in the open market. The recent pause in tariffs and potential for reshoring could also present long-term opportunities in PEBO's markets.

Performance with Perspective: Navigating Dynamics with Core Strength

Peoples Bancorp's recent financial performance reflects a blend of strategic execution, market dynamics, and the impact of prior acquisitions. For the first quarter of 2025, the company reported net income of $24.3 million, resulting in diluted earnings per share of $0.68. This compares to $26.9 million and $0.76, respectively, in Q4 2024, and $29.6 million and $0.84 in Q1 2024.

Net interest income stood at $85.3 million in Q1 2025, a decrease of $1.3 million from Q4 2024 and $1.4 million from Q1 2024. The net interest margin was 4.12% in Q1 2025, down from 4.15% in Q4 2024 and 4.26% in Q1 2024. This decline was primarily attributed to a decrease in accretion income, net of amortization, from acquisitions, which contributed 17 basis points to NIM in Q1 2025, down from 23 basis points in Q4 2024 and 32 basis points in Q1 2024, driven by fewer loan payoffs. On a core basis, excluding accretion, net interest income grew and net interest margin expanded by 3 basis points in Q1 2025 compared to the linked quarter, indicating underlying stability. Interest-bearing deposit costs declined by 12 basis points in Q1 2025 compared to Q4 2024, benefiting from lower rates on growing retail CD balances. Total deposits increased by $144.5 million (2%) in Q1 2025, with core deposits growing over 3%, partially offsetting a decrease in short-term borrowings ($174.2 million net decrease). Uninsured deposits were estimated at $2.1 billion at March 31, 2025, with a significant portion covered by pledged securities.

Total non-interest income, excluding net gains and losses, increased in Q1 2025 compared to Q4 2024, primarily due to seasonal performance-based insurance commissions ($1.5 million increase), partially offset by lower deposit account service charges and electronic banking income. Compared to Q1 2024, this metric increased by $1.3 million, driven by additional operating lease income and trust/investment income, despite decreases in insurance income and bank owned life insurance. Lease income, in particular, saw an increase compared to prior periods due to higher month-to-month lease income and gains on terminated leases.

Total non-interest expense increased slightly in Q1 2025 compared to Q4 2024, reaching $70.8 million. This was influenced by annual first-quarter expenses, including $1.3 million in stock-based compensation true-up/upfront expense and $0.7 million in HSA contributions. Compared to Q1 2024, non-interest expense was up 3% ($2.3 million), driven by higher data processing/software costs (related to technology projects), increased salaries/employee benefits (sales-based compensation, medical costs), and other miscellaneous expenses, partially offset by lower occupancy costs. The efficiency ratio reflected these dynamics, increasing to 60.7% in Q1 2025 from 59.6% in Q4 2024 and 58.1% in Q1 2024.

Profitability ratios, such as return on average assets (1.07% in Q1 2025) and return on average tangible equity (14.66% annualized in Q1 2025), decreased compared to prior quarters, primarily due to the factors impacting net income and non-interest expense.

The capital position remains robust, with ratios well above regulatory minimums for a well-capitalized institution. The tangible equity to tangible assets ratio improved to 8.34% at March 31, 2025, from 8.01% at December 31, 2024, benefiting from net income and a decrease in accumulated other comprehensive loss related to investment securities. Tangible book value per common share also saw healthy growth, reaching $20.68 at quarter-end. Liquidity is managed through a mix of short-term sources, loan/security cash flows, and borrowing capacity, with liquid assets and unpledged securities providing ample flexibility.

Credit Quality and Risk Management: Addressing Portfolio Specifics

Credit quality trends in Q1 2025 showed overall improvement, with nonperforming assets decreasing to 0.50% of total assets from 0.53% at year-end 2024. Criticized loans declined by $14.8 million and classified loans by $5.0 million, primarily due to paydowns and upgrades in the commercial portfolio. Delinquency rates saw a slight increase, with 98.5% of the loan portfolio considered current compared to 98.7% at year-end 2024.

The allowance for credit losses (ACL) increased to $65.2 million (1.01% of total loans) at March 31, 2025, from $63.3 million (1.00% of total loans) at December 31, 2024. This increase was attributed to a deterioration in macroeconomic conditions within the CECL model, an increase in reserves on individually analyzed loans, and loan growth during the quarter.

Net charge-offs (NCOs) totaled $8.1 million in Q1 2025, representing an annualized rate of 0.52% of average total loans. This was a decrease from the Q4 2024 rate of 0.61% ($9.6 million) but an increase from Q1 2024 (0.22%, $3.3 million). The NCO trend continues to be significantly influenced by the small ticket leasing business (North Star Leasing), which contributed 31 basis points to the Q1 2025 annualized rate, down from 49 basis points in Q4 2024. Management views the Q4 2024 period as the anticipated peak for leasing charge-offs and expects a gradual decline towards a normalized range of 4-5% for this portfolio, which aligns with historical averages prior to Peoples' ownership and is considered appropriate for the high origination yields (18-20%) in this business. Strategic adjustments, including tightening in the broker channel and pulling back from certain industries (e.g., titled fleet, hospitality), are intended to support this normalization. While elevated, management emphasizes the small ticket leasing portfolio's profitability (ROAA >2% YTD 2024) and its relatively small size (~3% of total loans). Consumer indirect loan NCOs have also increased, returning to pre-pandemic levels, a trend seen nationally, but management maintains discipline with high average FICO scores on new production.

Loan concentrations are actively monitored. Commercial real estate (including construction) remains the largest segment at 39.7% of total loans, but management highlights a favorable mix shift towards commercial and industrial loans in 2024. Exposure to potentially higher-risk segments like non-owner-occupied office space is low (<2%), and the multifamily portfolio is concentrated in strong metro markets.

Interest rate risk is managed to a relatively neutral position, with the balance sheet structured to benefit modestly from rising rates while mitigating the impact of declines. Stress testing indicates manageable impacts on net interest income and economic value of equity under various scenarios.

Outlook and Strategic Trajectory: Building on Foundational Strengths

Peoples Bancorp has provided clear guidance for 2025, signaling confidence in its ability to generate positive operating leverage and improve profitability metrics like return on average assets compared to 2024. This outlook is underpinned by expectations for controlled expenses, with quarterly non-interest expense projected between $69 million and $71 million (excluding Q1 seasonal items), benefiting from efficiencies derived from recent technology investments.

The net interest margin is anticipated to stabilize between 4% and 4.2% for the full year 2025, even assuming 50 basis points of Federal Reserve rate cuts spread across the year. Management is positioned for rate declines to have a minor impact on NIM, leveraging the ability to reprice deposit costs lower, particularly on the relatively short-duration retail CD portfolio. Accretion income is expected to contribute 15-20 basis points to NIM in the first half of 2025, gradually declining thereafter, with total accretion income for the year estimated at $10 million to $15 million.

Loan growth is targeted between 4% and 6% for 2025, reflecting a disciplined approach that balances strong production pipelines with anticipated paydowns and strategic adjustments in the leasing portfolio. Deposit growth is expected to support this, with a projected 2-3% annual increase.

The provision for credit losses is anticipated to normalize in the second half of 2025, returning to levels similar to the 2024 quarterly run rate. This aligns with the expectation for the small ticket leasing NCOs to continue their gradual decline from the Q4 2024 peak. The overall net charge-off rate for the full year 2025 is projected to be modestly lower than the 2024 rate. Management views the current ACL level (1.01% of loans) as reasonable, potentially ticking up slightly but remaining within the historical 1% to 1.25% range.

Strategically, PEBO remains focused on leveraging its diversified business model, enhancing operational efficiency through technology, and pursuing talent acquisition to drive organic growth. The company continues to evaluate M&A opportunities, with a preference for larger deals that could accelerate its trajectory past the $10 billion asset threshold, while maintaining strategic patience to ensure the right fit. The tenth consecutive annual increase in the quarterly dividend underscores the commitment to shareholder returns, supported by strong capital levels.

Conclusion

Peoples Bancorp stands as a well-capitalized, diversified regional bank executing a strategy focused on leveraging its community presence, expanding its specialty finance capabilities, and investing in technology to enhance efficiency and client service. While recent performance has been influenced by normalizing credit trends in specific portfolios, particularly small ticket leasing, management's proactive adjustments and clear outlook for declining charge-offs and expense control provide a credible path to positive operating leverage and improved profitability in 2025. The company's ability to attract low-cost deposits, coupled with a relatively neutral interest rate sensitivity, positions it to navigate potential rate changes effectively. With a stated appetite for disciplined organic growth and opportunistic, larger-scale M&A, Peoples Bancorp is actively shaping its future trajectory. The investment thesis hinges on the successful execution of its strategy to drive efficiency gains from technology investments, normalize credit costs, and capitalize on growth opportunities in its core and specialty markets, ultimately translating into sustainable shareholder value.