Peoples Bancorp Margin Widens Third Straight Quarter as Credit Costs Ease
Net interest margin at Peoples Bancorp (PEBO) expanded to 4.23% and provision expense fell to $4.7 million, even as a bond-portfolio restructuring tied to its pending Citizens merger dented per-share earnings by 18 cents.
Peoples Bancorp (PEBO) posted its third consecutive quarter of net interest margin expansion, with NIM rising 7 bps to 4.23% from 4.16% as deposit costs continued to fall. Net interest income climbed $2.3 million QoQ to $92.7 million, up 6% YoY. The Marietta, Ohio-based regional lender's margin gains are increasingly organic rather than merger-driven: accretion income from the Limestone deal contributed just 5 bps to NIM in the second quarter, down from 6 bps in the first quarter and 12 bps a year earlier, as purchase-accounting benefits continue to run off.
Credit costs eased sharply. Provision for credit losses dropped to $4.7 million from $9.7 million in the first quarter and $16.6 million a year ago, reflecting reduced balances in higher-loss segments, while the net charge-off rate improved 9 bps QoQ to 0.31%, itself down from 0.44% in the fourth quarter of 2024. That trend sits alongside a less reassuring signal: criticized loans jumped $49.7 million, or 22%, QoQ to 4.01% of total loans from 3.31%, driven by two commercial loan downgrades. The divergence between falling realized losses and rising criticized-asset flags is worth watching into the back half of the year, since criticized-loan migration typically leads charge-offs rather than lagging them.
Loan growth held up on a period-end basis but decelerated on average. Period-end loans grew $51.4 million, a 3% annualized pace, led by commercial and industrial lending in life and commercial premium finance and construction, while other commercial real estate balances fell $57.7 million. Average loans rose just $39.4 million QoQ versus $331.1 million YoY, a softer sequential pace than the growth commentary management offered in the first quarter.
Deposits told a seasonal story. Core deposits fell $155.1 million QoQ on retail CD and governmental-deposit outflows, reversing the $191.8 million core deposit build reported in the first quarter, though average deposits still edged up $38.6 million QoQ on money market and non-interest-bearing growth. The seasonal drawdown did not prevent deposit costs from continuing to decline, the primary driver of this quarter's margin expansion.
Efficiency improved modestly to 58.3% from 58.6% in the prior quarter and 59.3% a year ago, as revenue growth outpaced a $1.1 million QoQ rise in non-interest expense tied to higher professional and legal fees.
The quarter's headline earnings drag came from a balance-sheet repositioning rather than operations. Peoples booked an $8.2 million net loss on the sale of $135.2 million in available-for-sale securities, a restructuring undertaken ahead of its pending merger with Citizens to manage the combined balance sheet under the $10 billion asset threshold. The trade cost 18 cents a share in non-core items, compared with just a penny in the first quarter. The size of the charge underscores how seriously management is treating the $10 billion threshold problem, which triggers stricter regulatory and Durbin Amendment costs once crossed.
Capital continued to build through the noise. Tangible book value per share rose to $23.56 from $22.95 QoQ, extending a climb that had already lifted the tangible equity-to-tangible assets ratio to 8.91% in the first quarter from 8.79% in the fourth quarter of 2024.
With margin expansion now running on deposit-cost relief rather than acquisition accounting, the durability of Peoples' NII growth will depend on whether commercial loan demand reaccelerates from its current sub-average pace and whether the jump in criticized loans proves contained to the two flagged credits or spreads further into the book.