PEBO Q2 2025: 11% Annualized Loan Growth; Charge-offs to Plateau
- Strong Loan Growth & Robust Pipeline: Management highlighted 11% annualized loan growth with robust production in the first half and very optimistic pipelines going into the third quarter, suggesting sustainable organic expansion.
- Improving Credit Quality: Executives emphasized that charge offs, particularly in the small ticket leasing portfolio, have peaked and are expected to plateau, reflecting effective active management of high-balance accounts and reduced credit deterioration risk.
- Strategic Capital Position & M&A Opportunities: The company maintains a strong capital position with an opportunistic approach to share repurchases and strategic M&A discussions in key geographic markets, positioning the bank for transformative long-term growth.
- Elevated credit risk in the small ticket leasing segment: The bank continues to experience high charge offs and provisions—with ongoing high net charge offs in the small ticket leasing business that are only expected to plateau, not decline significantly—which poses a risk to margins and overall credit quality.
- Deteriorated profitability in the NorthStar business: Discussion during the Q&A highlighted that profitability in the NorthStar segment has tightened considerably versus past performance, potentially weighing on the overall return on assets.
- Conservative capital allocation delaying shareholder returns: Management’s focus on building and preserving capital—opting for opportunistic rather than aggressive share repurchases or capital distribution—could be a headwind for investors expecting more direct return of capital.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | –0.8% | Total Revenue declined slightly from $154.47 million in Q2 2024 to $153.29 million in Q2 2025, suggesting modest top‐line pressure. This slight drop may reflect lower contributions from traditional interest income, even as improvements in non‐interest income helped soften the decline. |
Interest Income | –3.3% | Interest Income decreased from $130.77 million in Q2 2024 to $126.41 million in Q2 2025, primarily due to lower revenue from core lending activities. Specifically, Loans and Leases dropped from $112.43 million to $108.84 million and Other Interest fell sharply from $2.50 million to $1.04 million, which combined resulted in the overall 3.3% decline. |
Loans and Leases | –3.1% (from $112.43M to $108.84M) | Revenue from Loans and Leases fell from $112.43 million to $108.84 million, indicating challenges in core lending activity. This decline may be due to weaker loan origination or portfolio adjustments affecting interest margins. |
Taxable Securities | +13.4% (from $14.84M to $16.81M) | Revenue from Taxable Securities increased by about 13.4%, from $14.84 million to $16.81 million, likely driven by yield improvements and favorable portfolio adjustments amid evolving market conditions. These factors helped boost income from securities despite any potential reductions in the average balance. |
Other Interest | –58.4% (from $2.50M to $1.04M) | Other Interest income declined sharply from $2.50 million to $1.04 million, reflecting a significant reduction in fee-related or ancillary interest revenue. This notable drop suggests that the components contributing to Other Interest in the previous period were not sustained in Q2 2025. |
Non-Interest Income | +13.5% (from $23.70M to $26.88M) | Non-Interest Income grew from $23.70 million to $26.88 million, an increase of approximately 13.5%, driven primarily by a dramatic surge in Lease Income (+273% increase from $1.12 million to $4.19 million). This improvement indicates effective diversification and enhanced performance in operating lease activities compared to the prior year. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Loan Growth | FY 2025 | Expected annual loan growth of 4% to 6% | Mid-single digits (4% to 6%), expected to be in the middle to higher end of the range | no change |
Deposit Growth | FY 2025 | no prior guidance | Growth in governmental deposits peaking around September 30, 2025, with other deposit categories expected to remain stable | no prior guidance |
Small Ticket Leasing Reserves | FY 2025 | no prior guidance | Believed to be at their peak and appropriately reserved for all portfolios | no prior guidance |
Net Interest Margin | FY 2025 | Anticipated full-year net interest margin of 4% to 4.2% | Expanded by three basis points to 4.15% | raised |
Deposit Costs | FY 2025 | no prior guidance | 1.76% for Q2 2025 | no prior guidance |
Loan to Deposit Ratio | FY 2025 | no prior guidance | Increased to 86% from 83% at March 31, 2025 | no prior guidance |
Regulatory Capital Ratios | FY 2025 | no prior guidance | Declined compared to the linked quarter | no prior guidance |
Tangible Equity to Tangible Asset Ratio | FY 2025 | no prior guidance | Stable at 8.3% at the end of Q2 2025 and March 31, 2025 | no prior guidance |
Deposit Growth Outlook | FY 2025 | no prior guidance | Governmental deposits expected to peak at the end of Q3 2025 and revert by Q4 2025 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Fee-Based Income Growth | Q2 2025 | Mid-single-digit percentages | 13.4% YoY (from 23.70In Q2 2024 to 26.88In Q2 2025) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Loan Growth & Pipeline Performance | In Q1 2025, Q4 2024, and Q3 2024, discussions highlighted modest loan growth (guided 4–6%), with varied growth across segments and some pressure from paydowns ( ). | Q2 2025 reported strong, balanced loan growth at 11% annualized with a robust pipeline and broad-based performance ( ). | Improved sentiment with accelerated growth and strengthened pipeline performance. |
Credit Quality Management (Small Ticket Leasing) | Prior calls (Q1 2025, Q4 2024, Q3 2024) focused on reducing charge-offs, portfolio quality improvements, and historical rates around 4.5% to 6.7%, with active management measures noted ( ). | Q2 2025 noted elevated net charge-offs (11.51% annualized), a smaller portfolio with high yields, and an expectation to plateau charge-offs ( ). | Cautious management remains, with continued focus on stabilization and yield enhancement despite persistent credit quality challenges. |
Strategic Capital Allocation, M&A, and Share Buyback Initiatives | Earlier periods (Q1 2025 and Q3 2024) included active engagement in M&A conversations, opportunistic share buybacks, and strategic capital deployment ( ). Q4 2024 mentioned M&A activity only ( ). | Q2 2025 emphasized capital retention over significant buybacks, prioritizing a strong capital position and strategic M&A with a focus on larger deals ( ). | Shift toward preserving capital and selectively pursuing larger strategic acquisitions, moving away from immediate buyback actions. |
Deposit Growth, Funding Strategy & Repricing Challenges | Across Q1 2025, Q4 2024, and Q3 2024, discussions centered on steady deposit growth (with retail CDs and brokered CDs playing key roles), careful funding management, and challenges in repricing deposits compared to loan repricing ( ). | Q2 2025 highlighted seasonal deposit fluctuations, stable balances, and active management of deposit and loan pricing to manage funding costs ( ). | Consistent focus on deposit growth and funding strategies with ongoing active management of repricing amid evolving rate conditions. |
Net Interest Margin Stability & Margin Compression Pressures | In Q1 2025, Q4 2024, and Q3 2024, guidance and commentary consistently targeted a NIM range of 4%–4.2%, with discussions of accretion income, deposit repricing, and modest margin compression due to rate changes ( ). | Q2 2025 reported a slight expansion (3 basis points) to a NIM of 4.15%, citing reduced deposit and borrowing costs while maintaining stability ( ). | Stable and slightly improving margins with disciplined pricing even as market conditions evolve; sentiment remains stable overall. |
Macroeconomic and External Risk Factors | Q1 2025 and Q4 2024 featured concerns about tariffs, external uncertainties, and cautious optimism among clients, while Q3 2024 offered indirect mentions of economic conditions via market indicators ( ). | Q2 2025 showed muted concerns—with continued strong demand and minimal observed tariff effects on growth and credit metrics ( ). | A shift from earlier cautiousness to a more neutral stance as external risk factors impact less and stable demand persists. |
Operational and Growth Uncertainties (including fee income pressures and loan paydowns) | Q1 2025, Q4 2024, and Q3 2024 discussed pressures from fee income volatility, challenges with mortgage and insurance income, and notable loan paydowns (e.g. CRE and commercial loan paydowns), balanced by operational efficiencies and steady growth targets ( ). | Q2 2025 revealed mixed outcomes: a slight decline in fee income due to seasonal factors offset by strong loan growth (11% annualized) but with significant loan paydowns (e.g. $171 million so far) ( ). | Ongoing uncertainties persist—with operational pressures and paydowns balancing robust loan growth; a cautiously optimistic outlook remains amid mixed signals. |
Emerging NorthStar Business Profitability Concerns | Q1 2025 specifically flagged concerns over elevated charge-offs, a high proportion of high balance accounts, and the need for portfolio normalization in the NorthStar Leasing business ( ). Q3 and Q4 2024 did not mention NorthStar explicitly. | Q2 2025 reiterated profitability concerns with management restructuring the business for improved performance and a return to prior profitability levels ( ). | Persistent concern that originated in Q1 continues to be a focus, with active restructuring efforts aimed at long-term profitability recovery. |
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Small Leasing
Q: How will charge-offs plateau in small leasing?
A: Management explained that the charge-offs in the small ticket leasing portfolio are expected to level off, as high‐balance accounts (which are not being replenished) naturally decline to Q2 levels, signaling stability despite prior elevated losses. -
Reserve Adjustments
Q: What about CECL and reserve changes?
A: They noted that increased reserves, driven partly by updated CECL loss drivers and adjustments for high-balance accounts, have peaked and should decline going forward. -
Loan Growth
Q: What drove strong loan growth this quarter?
A: Management attributed robust growth to balanced increases across credit categories and a solid pipeline, maintaining guidance in the 4–6% range despite seasonal variations. -
Deposit Outlook
Q: What is the deposit and pricing forecast?
A: They highlighted seasonal deposit fluctuations with modest retail CD growth and emphasized actively managing deposit rates to keep funding costs controlled, even in a flat interest rate environment. -
NorthStar Profitability
Q: How is NorthStar business performing?
A: Although margins in NorthStar have tightened recently, management is restructuring the business to restore profitability, targeting a 6%+ ROA over time. -
Accretion & Pricing
Q: What are the trends in accretion and loan pricing?
A: Accretion income contributed 12 basis points to the margin this quarter and is expected to remain in the low-to-mid teens, while loan yields and pricing remain disciplined across both variable and fixed-rate segments. -
Capital & M&A
Q: What is the approach to capital and acquisitions?
A: They are taking an opportunistic view on share repurchases while building capital for transformative M&A, focusing on strategic deals within their existing geographic footprints. -
Loan Yield Spread
Q: How will commercial loan yields change?
A: Management expects the spread between maturing loan yields and new production yields to remain stable over the next 12 months, reflecting consistent pricing discipline. -
Commercial Exposure
Q: Any concerns with the downgraded commercial exposure?
A: The downgraded commercial relationship, part of a broader commercial and industrial portfolio, is not concentrated enough to materially impact overall credit quality.
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