Peoples Bancorp Inc. (PEBO) Earnings Call Transcript

Good morning, and welcome to Peoples Bancorp Inc.'s conference call. My name is Nick, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the 3 and 6 months ended June 30, 2026. [Operator Instructions]. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections or other future-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. Management believes that forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples Second Quarter 2026 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 15 to 20 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year. Participants on today's call will be Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Nick. Good morning, everyone, and thank you for joining our call today. Earlier, we reported diluted earnings per share of $0.78 for the second quarter. When adjusted for onetime items, our diluted EPS for the quarter was $0.96, which exceeded consensus analyst estimates of $0.85 and -- these onetime items included an $8.2 million loss, which reduced diluted EPS by $0.18 related to the strategic sale of investment securities from our portfolio in preparation for the Citizens merger and our current strategic objective to remain below $10 billion in assets. We also recorded acquisition-related expenses of $410,000 during the second quarter, which reduced our diluted EPS by $0.01. We recently purchased an energy tax credit lowering our income tax expense by $480,000 in the second quarter and positively impacting diluted EPS by $0.01. We have several highlights for the second quarter as many of our performance metrics improved compared to the linked quarter. Our net interest income increased 3%, while our net interest margin expanded 7 basis points. Fee-based income grew over $340,000. Provision for credit losses declined 51%. The efficiency ratio improved to 58.3% compared to 58.6%. Our loans grew $51 million or 3% annualized. Noninterest-bearing deposits grew $7 million or 2% annualized. Our tangible equity to tangible assets ratio increased 34 basis points to 9.25%. Book value per share increased to $34.41 and from $33.85, a 7% annualized growth rate. Our tangible book value per share improved at an 11% annualized rate to $23.56 from $22.95 and all of our regulatory capital ratios improved. Our provision for credit losses totaled $4.7 million for the second quarter, a decline of $5 million or 51% compared to the first quarter. Our allowance for credit losses declined to 1.14% of total loans from 1.16% at March 31. Our lower provision for credit losses for the quarter was driven by a reduction in net charge-offs, coupled with the stabilization of macroeconomic conditions used within our model. Our annualized quarterly net charge-off rate improved to 31 basis points compared to 40 basis points for the linked quarter. Our indirect consumer net -- consumer loan net charge-offs decreased $751,000, which was driven by lower charge-offs and improved recoveries. We continue to see declines in our small ticket lease charge-offs, which were $3.4 million compared to $3.8 million for the first quarter. These charge-offs contributed 20 basis points to the annualized net charge-off rate for the second quarter. We have significantly reduced our position in high balance accounts, which totaled $7.2 million at June 30, and we have limited residual risk remaining within this segment of the small ticket leasing portfolio. For additional details on our small ticket leasing business, please refer to the accompanying slides. Our nonperforming loans increased slightly and were 0.6% of total loans at quarter end. Criticized loans grew $50 million compared to March 31, comprising 4.01% of total loans at quarter end, while classified loans declined $1 million. The increase in criticized loans was mostly related to 2 commercial credits, one of which was acquired. We do not currently expect any charge-offs to arise from these relationships. As a reminder, our first quarter criticized loans as a percent of total loans was 3.3%, which was lower than our typical historical run rate of around 4%. Our delinquency levels improved as 99.1% of our loan portfolio was considered current at June 30 compared to 98.9% at the linked quarter end. Moving on to loan balances. We generated loan growth of $51 million or 3% annualized. Commercial and industrial loans contributed $43 million of growth followed by increases in premium finance loans of $37 million, construction loans of $25 million and home equity lines of credit of $13 million. Overall, our lease balances grew with our mid-ticket leasing business, adding over $15 million in balances, partially offset by declines in our small ticket leasing portfolio. At the same time, our other commercial real estate loan balances declined $58 million as we experienced the elevated first half payoffs we had anticipated. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. For the second quarter, we saw improvement in our net interest income, which grew $2.3 million, while our net interest margin expanded 7 basis points. The reduction in our deposit costs benefited both net interest income and margin for the second quarter. Accretion income totaled $1.2 million compared to $1.3 million for the first quarter contributing 5 basis points and 6 basis points to net interest margin, respectively. For the first 6 months of 2026, net interest income improved $10.3 million or 6%, while net interest margin expanded 6 basis points. Our deposit cost discipline, along with higher interest income contributed to the increase. Accretion income totaled $2.4 million compared to $6.1 million for 2025, contributing 6 basis points and 15 basis points to net interest margin, respectively. As far as our balance sheet structure, at this time, we are positioned to benefit more from a rising rate environment, a falling rate environment would cause a nominal reduction in our net interest income. However, rate uncertainty validates our relatively neutral position. As it relates to our fee-based income, we had growth of over $340,000 compared to the linked quarter. We had improvements in the majority of our fee-based income line, which more than offset the decline in insurance income driven by the annual performance-based insurance commissions received in the first quarter of each year. For the first 6 months of 2026, fee-based income grew $3 million, mostly due to higher lease income and trust and investment income. Our noninterest expenses were up 2% compared to the linked quarter, which included $410,000 of acquisition-related expenses, the majority of which contributed to the increase in professional fees. For the first 6 months of 2026, noninterest expenses were up 2%. The growth was driven by higher operating lease expense, which corresponds to our fee-based lease income as well as salaries and employee benefits costs and data processing and software expense. For the first half of 2026, we have recorded $426,000 of acquisition-related expenses. Our reported efficiency ratio was 58.3% for the second quarter and 58.6% for the linked quarter. The improvement in our efficiency ratio was driven by higher revenue compared to the first quarter. For the first 6 months of 2026, our reported efficiency ratio was 58.4% compared to 16% for the prior year and was also driven by higher revenue. Looking at our balance sheet at quarter end, our loan-to-deposit ratio increased to 91.5% compared to 88.5% at March 31, as we had loan growth for the second quarter, coupled with a reduction in deposits. Our investment portfolio as a percent of total assets declined to 19.1% at June 30 compared to 20.3% at the linked quarter end. The decline was driven by the sale of approximately $135 million of available-for-sale investment securities resulting in a loss of $8.2 million for the second quarter. These sales were part of our current plan to stable loan $10 billion in total assets and restructure our portfolio in conjunction with the pending Citizens merger. Our core deposit balances, which exclude brokered CDs, declined $155 million compared to March 31. As expected, we had seasonal decreases in our governmental deposits, which were down $87 million. We also had reductions in our interest-bearing demand accounts of $17 million. During the second quarter, we also had reductions of $92 million in retail CDs. However, we improved our deposit cost by 6 basis points compared to the linked quarter. These declines were partially offset by an increase of $37 million in money markets and $7 million in noninterest-bearing deposits. Our demand deposits as a percent of total deposits grew to 36% at June 30 compared to 35% at the linked quarter end. Our noninterest-bearing deposits to total deposits ratio was flat at 21% for both June 30 and March 31. As it relates to our capital levels, all of our regulatory capital ratios improved compared to the leach quarter end as earnings outpaced dividends. I will now turn the call back over to Tyler for his closing comments.

Thank you, Katie. We continue to make progress with the pending Citizens merger and are excited about the opportunity to bring our associates together. We have spent a considerable amount of time within the footprint, interacting with associates and hosting meetings to discuss our future. We are coordinating processes between teams both on the front lines and operationally to ensure a seamless transition. We are awaiting regulatory and Citizens shareholder approvals for the merger, but are anticipating a close date of early in the fourth quarter of 2026. As with recent bank acquisitions, the core system conversion will be at a later date, which we are targeting to take place early in the second quarter of 2027. At the same time, we will continue to be opportunistic about other potential acquisitions. Moving on to our performance expectations for the full year of 2026, excluding the impact of noncore expenses and the planned merger, we expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4.1% and 4.3% for the full year of 2026. The 25 basis point increase in rates from the Federal Reserve is expected to result in a 6 to 8 basis point improvement in our net interest margin for the full year. We believe our quarterly fee-based income will range between $28 million and $30 million. We expect quarterly total noninterest expense to be between $73 million and $75 million for the 2 remaining quarters of 2026. We believe our loan growth will come in towards the low end of our guided range of 3% to 5% due to the continued movement of paydowns from late 2025 to 2026. We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to continue to positively impact provision for credit losses, excluding any changes in the economic forecast. For the remainder of the year, we will focus on the integration of the Citizens merger, along with continuing to develop our core business, while closely monitoring our total asset levels in relation to the $10 billion threshold. As we mentioned before, we continue to have diverse and potentially fruitful conversations with other institutions. Our lines of business work together to deliver a client experience unlike many institutions and we see opportunities arise because of our unique market offerings. For the clients and associates of Citizens, we are excited to share our deep bench of experienced professionals who will bring access to our vast array of products and services. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

[Operator Instructions]. The first question will come from Jeff Rulis with D.A. Davidson.

This is Ryan Payne on for Jeff Rulis today. Starting on the margin, does that $410 million to $430 million for the full year bake in any rate move expectations?

It does not. It's a relatively stable rate environment.

Got it. Okay. And maybe the bigger picture, what would have to happen for the margin to end the year at the higher end of that range?

I mean I think the aggressiveness by which we continue to reprice our CDs and the ability to maintain a sizable deposit book and the noninterest-bearing or the interest-bearing account. I think that will be heavily influencing as you saw the outcome in this quarter in the margin. So I think that will have heavy influence in the margin going forward.

Understood. On things going off deposits there, some seasonality, it sounds like. But how would you describe the competitive environment for funding now and would you expect to increase rates to maintain or grow deposits this year?

I would say that deposit competition remains relatively stable. I think it's competitive, but it's not increasingly so relative to what we've been seeing in the last few months. I think we will continue to evaluate the term of rate increases. I don't know that the rack rates on the shorter-term products will move significantly. But I think with expectations as they are and as they evolve over time, we'll continue to evaluate the term at which we're raising rates.

The next question will come from Brendan Nosal with Hovde Group.

This is Amira on for Brendan. First question, kind of looping back to the NIM and looking on Slide 15. In we can see you increase your sensitivity to a plus 25% increase for the Fed funds from 3 to 4 basis points previously to 6 to 8 basis points currently. Can you just unpack that change a bit and dig into the drivers behind that?

Yes. So I just want to be clear, the projection or the guidance of $410 million to $430 million is a steady rate environment. It does not include an increase or a decrease in rates. What we have been doing in the past couple of quarters is quantifying if rates do go down by 25 basis points or the Fed moved by 25 basis points. We've been quantifying what that would do on an annual basis to our margin. And given when we were drafting this, the expectation was more likely for a rate increase than a rate cut, we quantified the upside potential of a 25 basis point increase. that's not baked into that $410 million to $430 million that's just articulating what the benefit would be if that situation unfolds. And so I think it's largely the -- we have over 50% of our loan portfolio is variable rate. So I think that's influencing the benefit on the upside and given our deposit costs. As you can see in the release and in the presentation, there's not as much room to go down in that avenue as there is to go up on the variable rate loans.

And just one follow-up, leaping into credit in your opening remarks, you talked about those 2 commercial credits. Is there any other color that you can provide on them

Sure. This is Tyler. A couple of thoughts. 2 completely different credits, first of all. So no commonality between them. One is a larger multifamily project that is in footprint somewhat anchored to a related kind of large economic project that is somewhat delayed, but we believe will continue. So hence, the comment that we don't expect any kind of losses over the long term in that project. The other is in vehicle floor plan finance that we expect to be fully paid off by the end of the year. again, no losses as expected and no pattern there, just kind of a reversion to the mean is what I would say with respect to the criticized and our kind of historical averages.

The next question will come from Daniel Tamayo with Raymond James.

This is Tim Delas on for Danny. So just starting off on loan growth here. Loan growth was obviously impacted by the CRE paydown activity. But otherwise, growth is pretty good outside of that. So -- just curious if you can help us think about the expectations you guys have for payoff activity in the back half of the year and maybe how loan pipelines are shaping up?

Sure thing. Thanks for the question. So a couple of thoughts on the expected paydowns. We guided last quarter that we expected about $480 million in payoffs for the full year and estimated that we would come in at about 2/3 to 3/4 of that in the first half. where we came out was about $300 million in the first half. We still expect the full year to fall somewhere around that original estimate. So call it anywhere from $150 million to $200 million for the remainder of the year. So that certainly is a bit of a headwind. And then you combine that a little bit with some of the good, I would say, robust pipeline that's kind of competing with that. and a little bit of remixing over the last multiple quarters into the C&I business away from the CRE business because of the increased paydowns in CRE is where we land there at that kind of lower end of the guide because the payoffs amortization and then the final kind of factor I would add would be that in the consumer lending we're seeing kind of muted demand. So we expect kind of indirect auto to be largely flat throughout the year and not experience growth as well. So those would be the kind of puts and takes factors that are getting us out there with respect to the loan growth.

I appreciate all that color, Tyler. Katie, maybe one for you. Just a point of clarification on the prepositioning during the quarter. hoping you can help us out, tell us when those securities were sold during the quarter and kind of what the yields were on the securities that were sold?

Yes. They were sold in early May. -- and the yields were about $275 million.

Okay. I appreciate that. And then, Tyler, maybe one last one for you. As you've gotten deeper here in the integration planning with Citizens, just curious if there are any aspects of the franchise that stood out to you or any incremental areas where you believe legacy people kind of enhance the franchise further since we last spoke in April.

Yes. Since we last spoke, the story is really -- it is what we thought it was, and that's why we're very excited about adding it. The strong deposit base good loyal clients and communities that we do well in and an opportunity, we have added some, for example, some wealth management professional capabilities in those markets and are already seeing some benefits there. We are very strong in insurance in Eastern Kentucky and bringing to bear that those introductions to our clients and kind of the beginnings of the cross-pollination that will take place over the coming months and years. And so we're very excited about those 2 core businesses of ours, particularly the investments in insurance and the opportunity to provide those to the Citizens clients. And everything is according to plan. I will note just since you asked about Citizens and a couple of the early reaction notes, I think, commented that -- the expected closing was delayed. We don't view it as delayed. And if we gave that impression, I just wanted to clear that up. I think we had guided second half in last quarter's call, and we are still right on schedule and everything, of course, is pending regulatory approval and shareholder approval, but we are -- we believe we're right on track with where we expect it to be.

Okay. Terrific. Well, thanks for that point of clarification and color there, Tyler.

The next question will come from Tim Switzer with KBW.

I have a follow-up on the balance sheet restructuring. I think you guys previously talked about selling about $560 million of balances, including the Citizens portfolio, should we expect more sales to occur before the deal closes? And if it's after the deal closes, what's the timing we should expect for that?

Yes. So just as a reminder, about half of that was the sale of what we would be acquiring from citizens in their investment portfolio and then about half of it was selling some of our portfolio, and you've seen us sell about half of our contribution of that. We would anticipate selling the Citizens portion in as close to close as possible. And we will continue to evaluate the sale of the remaining component of our portfolio. We may do something in the third, but it likely wouldn't be until the fourth and it all just be dependent on where we are from an asset size and where the rate environment is at the time.

Okay. And do you still see a way for that to be accretive to NII by pairing it with the offloading of I assume brokered deposits kind of like what we saw this quarter?

Yes. I think that's right. And an overnight position as well once brokerage completely eliminated, reduced.

Okay. That's helpful. And putting citizens aside for a minute, how do you see the trajectory of the margin over the rest of this year and early '27. Assuming there's no rate movements at all. Do you think you can continue to squeeze out a little bit of margin improvement going forward?