Peoples Bancorp Q3 Margin Expands as One-Time Items Weigh on EPS

Peoples Bancorp Inc. (NASDAQ: PEBO) reported third-quarter 2026 net income of $32.6 million, or $0.91 per diluted share, as stronger net interest income, higher fee-based revenue and a lower provision for credit losses supported results. Earnings were reduced by $4.5 million of investment-securities losses and $1.5 million of acquisition-related expenses, which together lowered diluted earnings per share by $0.13. Excluding those items, diluted EPS was $1.04.

Net interest income rose 1% from the second quarter to $93.8 million, primarily reflecting increased loan income. Net interest margin expanded eight basis points sequentially to 4.31%, largely because of higher investment and loan yields. For the first nine months of 2026, net interest income increased by $12.8 million to $277.0 million, while margin widened eight basis points, with the company attributing the improvement to controlled deposit costs.

Return on average assets was 1.36% in the quarter, while return on average stockholders’ equity reached 10.44%.

Fee income rises as securities losses decline

Non-interest income increased 26% from the prior quarter to $25.6 million, benefiting from a reduction in investment-securities losses to $4.5 million from $8.2 million. Peoples said the sales were connected with its strategy to remain below $10 billion in total assets and the restructuring of its investment portfolio ahead of the pending Citizens merger.

Excluding gains and losses, non-interest income rose 5% sequentially to $30.5 million. The increase reflected higher lease income, deposit-account service charges, trust and investment income, and bank-owned life insurance income. For the first nine months of the year, non-interest income excluding gains and losses increased 8% to $88.1 million.

Non-interest expense rose 2% from the second quarter to $74.5 million, including $1.5 million of acquisition-related costs. The increase was mainly due to higher professional fees. The reported efficiency ratio edged up to 58.5% from 58.3%, but the ratio excluding non-core items improved to 57.3% from 57.9% as revenue increased.

Loan growth remains limited while asset-quality measures diverge

Total loans increased by $19 million from June 30, representing 1% annualized growth. At September 30, originated loans and leases totaled $5.76 billion, while acquired loans and leases were $1.08 billion. Variable-rate loans accounted for 61% of the portfolio, with fixed-rate loans making up the remaining 39%.

Nonperforming loans declined by $4 million, or 11%, from the prior quarter. Nonperforming assets represented 0.38% of total assets, down from 0.43%, and 99.2% of the loan portfolio was current, compared with 99.1% at June 30. The allowance for credit losses was 1.11% of total loans and covered 206.83% of nonperforming loans, up from 190.78% in the previous quarter.

Other credit indicators were mixed. Criticized loans decreased by $18 million, but classified loans increased by $30 million following the downgrade of two commercial real-estate relationships and one commercial-and-industrial relationship. Peoples said it was exiting those credits and did not anticipate significant losses from them.

The provision for credit losses declined 24% from the linked quarter, reflecting lower reserves for individually analyzed loans and updates to prepayment, curtailment and funding rates. Those benefits were partly offset by higher net charge-offs. The annualized net charge-off rate increased to 0.35% from 0.31%, although small-ticket leasing charge-offs continued to decline.

Deposit mix shifts toward interest-bearing accounts

Deposits excluding brokered certificates of deposit increased by $19 million during the quarter. Interest-bearing demand accounts rose by $52 million and money-market balances increased by $46 million, partly offset by a $44 million reduction in retail certificates of deposit and a $34 million decline in non-interest-bearing accounts.

The quarterly deposit cost was 1.48%, compared with 1.46% in the second quarter. Retail customers, defined as consumers and small businesses, accounted for 78% of deposits, with commercial customers representing 22%.

All regulatory capital ratios improved during the quarter as earnings exceeded dividends. The total risk-based capital ratio increased to 14.29%, and the common equity Tier 1 ratio rose to 12.81%. However, the tangible equity-to-tangible assets ratio declined to 9.06% from 9.25% because higher unrealized losses on available-for-sale securities reduced stockholders’ equity.

Management outlines 2026 and 2027 expectations

Peoples expects positive operating leverage in 2026, excluding non-core expenses and including the Citizens merger. Management projects a full-year net interest margin of 4.20% to 4.30%, fourth-quarter non-interest income excluding gains and losses of $28 million to $30 million, and fourth-quarter non-interest expense of $78 million to $80 million.

The company expects 2026 loan growth of 6% to 8% from 2025, including the effect of acquired Citizens loans. It also anticipates lower net charge-offs than in 2025, which it expects to reduce the provision for credit losses, assuming no changes in economic forecasts.

For 2027, excluding non-core expenses and the pending Capital Bancorp Inc. merger, Peoples expects positive operating leverage and a net interest margin of 4.30% to 4.50%. That margin forecast assumes a 25-basis-point Federal Reserve rate increase in late 2026, followed by increases in March and September 2027.

Management expects 2027 non-interest income excluding gains and losses of $31 million to $33 million per quarter. Quarterly non-interest expense is projected at $80 million to $82 million in the second through fourth quarters, with first-quarter costs expected to be higher because of recurring annual expenses. Loan growth is expected to range from 3% to 5%, depending on the timing of portfolio paydowns, while charge-offs and the net charge-off rate are expected to be similar to 2026, including projected increases related to the Citizens portfolio.

The outlook remains subject to changes in economic forecasts, interest rates, credit performance and loan-paydown timing. The proposed Capital Bancorp transaction also remains pending, while Peoples’ 2027 expectations explicitly exclude that merger.