Prepared remarks
Good morning. And welcome to Peoples Bancorp Inc. 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 three and six months ended 06/30/2026. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad, and questions will be taken in the order that they are received. If you would like to withdraw your question, please press star and then 2. 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 forward-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 the 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 one year. Participants on today's call will be Tyler J. Wilcox, President and Chief Executive Officer, and Kathryn Bailey, Chief Financial Officer and Treasurer. 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 one-time items, our diluted EPS for the quarter was $0.96, which exceeded consensus analyst estimates of $0.85. These one-time 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 thousand 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 thousand 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 thousand. 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. Non-interest-bearing deposits grew $7 million, or 2%. Our tangible equity to tangible assets ratio increased 34 basis points to 9.25%. Book value per share increased to $34.41 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 regular 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 loan charge-offs decreased $751 thousand, 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. 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 two 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 six 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 thousand compared to the linked quarter. We had improvements in the majority of our fee-based income lines, 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 six 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 thousand of acquisition-related expenses, the majority of which contributed to the increase in professional fees. For the first six 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 thousand 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 six months of 2026, our reported efficiency ratio was 58.4% compared to 60% 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 stay below $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 market balances and $7 million in non-interest-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 non-interest-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 linked 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 non-core 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. A 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 two 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 J. Wilcox. Joining me for the Q&A session is Kathryn Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator.
Questions and answers
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble the roster. The first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.
Good morning. This is Ryan Payne on for Jeff Rulis today. Starting on the margin, does that 4.10% to 4.30% for the full year bake in any rate move expectations?
It does not. It is a relatively stable rate environment.
Got it. Okay. And maybe 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 in the noninterest-bearing or interest-bearing accounts will heavily influence the margin. As you saw in the outcome this quarter, that will have a heavy influence on the margin going forward.
Understood. And I was going off on 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 the deposit competition remains relatively stable. I think it is competitive, but it is not increasingly so relative to what we have been seeing the last few months. We will continue to evaluate the timing of rate increases. I do not know that rates on the shorter-term products will move significantly, but with rate expectations as they evolve over time, we will continue to evaluate the term at which we are raising rates.
Okay. Thanks. That is all for me.
Thank you. The next question will come from Brendan Nosal with Hovde Group. Please go ahead.
Hi, this is Anisha Ghosh on for Brendan. First question: moving back to NIM and looking on Slide 15, we can see you increased your sensitivity to a plus 25 basis point 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. Just to be clear, the projection or guidance of 4.10% to 4.30% is a steady-rate environment and 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 if the Fed moves by 25 basis points, and what that would do on an annual basis to our margin. 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 is not baked into the 4.10% to 4.30% guidance; it is just articulating what the benefit would be if that situation unfolds. It is largely the asset side: over 50% of our loan portfolio is variable rate, so that influences the benefit on the upside. Given our deposit costs, there is not as much room to go down on deposits as there is to go up on the variable-rate loan side.
Thank you. And just one follow-up looping into credit in your opening remarks: you talked about those two commercial credits. Is there any other color that you can provide on them?
Sure. A couple of thoughts — they are two completely different credits, so there is no commonality between them. One is a larger multifamily project in our footprint somewhat anchored to a related large economic project that is somewhat delayed, but we believe it will continue. Hence the comment that we do not 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 expected and no pattern there — just a reversion to the mean with respect to the criticized loans and our historical averages.
Perfect. Thank you. That is all my questions.
Thank you. The next question will come from Daniel Tamayo with Raymond James. Please go ahead.
This is Tim Brown on for Danny. Hope you are doing well.
Hey, Tim. Good to hear from you.
Starting off on loan growth: loan growth was obviously impacted by the CRE paydown, but otherwise growth is pretty good outside of that. Can you help us think about the expectations you have for payoff activity in the back half of the year and maybe how loan pipelines are shaping up?
Sure. A couple 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 two-thirds to three-quarters of that in the first half. We came in at 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. That is a headwind. Combine that with a good pipeline that is competing with that and a continued remixing into the C&I business away from CRE due to increased paydowns. We land at the lower end of the guide because of the payoffs, amortization, and the fact that consumer lending demand is muted. We expect indirect auto to be largely flat throughout the year and not to experience growth. Those are the main puts and takes affecting loan growth.
I appreciate all that color, Tyler. Katie, maybe one for you: just a point of clarification on the pre-positioning during the quarter. Can you help us out with when those securities were sold during the quarter, and what the yields were on the securities that were sold?
Yes. They were sold in early May and the yields were about 2.75%.
I appreciate that. And then, Tyler, maybe one last one: as you have gotten deeper in integration planning with Citizens, are there any aspects of the franchise that stood out to you or any incremental areas where you believe legacy Peoples can enhance the franchise further since we spoke in April?
Since we last spoke, the story is really what we thought it was, and that is why we are excited about adding it. Strong deposit base, good loyal clients and communities where we do well, and opportunity. We have already added some wealth management professional capabilities in those markets and are seeing some benefits. We are very strong in insurance in Eastern Kentucky and will be introducing those capabilities to Citizens' clients — the beginnings of cross-pollination that will take place over the coming months and years. Everything is according to plan. I will note that if we gave the impression the expected closing was delayed, I want to clear that up: we do not view it as delayed. We had guided second half on the last quarter's call, and we are still right on schedule. Of course, everything is pending regulatory approval and shareholder approval, but we believe we are right on track where we expected to be.
Okay. Terrific. Thanks for that clarification and color, Tyler. I will step back now.
Thank you. The next question will come from Tim Switzer with KBW. Please go ahead.
Hey, good morning. Thank you for taking my questions.
Good morning.
Good morning, Tim.
I had a follow-up on the balance sheet restructuring. I think you 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 after the deal closes, what timing should we expect?
As a reminder, about half of that was the sale of what we would be acquiring from Citizens and their investment portfolio, and about half was selling some of our portfolio. You have seen us sell about half of our contribution to that. We would anticipate selling the Citizens portion as close to close as possible. We will continue to evaluate the sale of the remaining component of our portfolio. We may do something in the third quarter, but it likely would not be until the fourth quarter, and it will depend on where we are from an asset size perspective and where the rate environment is at the time.
Do you still see a way for that to be accretive to net interest income by pairing it with the offloading of, I assume, broker deposits like what we saw this quarter?
Yes. I think that is right. An overnight position as well once brokers are completely reduced or eliminated should help.
That is helpful. Putting Citizens aside, how do you see the trajectory of the margin over the rest of this year and early 2027, assuming there is no rate movement at all? Do you think you can continue to squeeze out a little bit of margin improvement going forward?
Yes. I think there continues to be some mix shift in the deposit portfolio, so I think there is upward potential.
The only thing I would add is that we have been decreasing the small ticket leasing portfolio and we expect in early 2027 for that to begin to turn around and see growth there. Higher-yielding assets there have the potential to impact net interest margin as well.
How do you see the rate environment, especially with rates moving higher over the last few months, impacting the credit performance of the leasing portfolio?
I think it depends. We have weathered fuel price increases and other pressures. This portfolio is a bit more small business oriented. These are fixed-rate leases in this business, and the terms are not incredibly long, so we think there is limited incremental credit risk overall. We do not think a quarter or a couple of rate increases will be a meaningful change. Recall that portfolio is already at a gross origination yield between 18% and 20%, so they are not particularly rate sensitive given where originations are.
Got it. That is super helpful. Thank you, guys.
The next question will come from Nathan Race with Piper Sandler. Please go ahead.
Hey, this is Adam on for Nate. Good morning, Tyler and Katie, and thanks for taking my questions. Maybe a question for Katie: last quarter you mentioned an additional 15 to 20 basis points opportunity of potential NIM expansion for 2027 post the security sales and borrowings pay down. Is that still the right way to think about it for 2027 and any additional color?
Yes. I think so. That was in conjunction with the Citizens acquisition and collectively was inclusive of the securities sale we have been talking about. We just preemptively did a portion of our sale in the second quarter, but yes, that is still accurate.
Got it. Could you remind us what you have in terms of fixed-rate loans that would be set to reprice higher over the next 12 months or so?
Our fixed-rate book is about 46% to 48% of the portfolio with an average life of about three to five years.
Maybe moving to the charge-off guide: you mentioned a slight reduction for 2026. Can you quantify that a bit further and your expectation that charge-offs remain around this 30- to 40-basis-point range for the back half of the year?
At this point, slight may be understating it. We were pleased moving to an annualized rate of 31 basis points, and I think you will see consistency. A major component of that has been the decline in small ticket leasing — that was 20 basis points of our 31 basis points this quarter. We talked about plateauing in the second half and coming down, and we are seeing that happen a little earlier than expected, which is positive. We expect the trend to continue for the remainder of the year, with continued strength in commercial lending, consumer coming down after the first quarter is historically our larger charge-off quarter, and small ticket leasing continuing to decline. We are optimistic.
Got it. Thanks, Tyler. On North Star, could you quantify the contribution to charge-offs from the high-balance accounts during the quarter?
Sure. The high-balance accounts at this point came in at about $7.2 million of the total portfolio. Their contribution to losses was about $1.3 million to $1.4 million of the approximately $9 million in charge-offs year-to-date. That is year-to-date, not just quarterly.
Okay. Got it. Thanks for taking my questions.
Thank you. The next question will come from Daniel Cardenas with Breen Capital. Please go ahead.
Morning, guys.
We are in, Daniel.
Hey, Daniel.
Thanks for all the color on the margin and all the moving pieces. It sounds like deposit competition is still relatively stable. Can you provide some color on the lending side? What is competition for the better-quality loans looking like? Would you say competition is still rational coming into Q3?
Largely rational. There is some pressure on balances, particularly in commercial real estate, with increased competition, and we are not inclined to chase poor pricing. We will trade slightly lower balances to stick to our pricing discipline. We are not seeing any irrational behavior broadly. We are scrutinizing deals and being competitive where appropriate. There may be fewer projects in general, but nothing to identify as a major trend. I hope that helps.
Very helpful. And then regarding your margin this quarter, accretion was about 5 basis points contribution. Absent Citizens, is the expectation that accretion will continue to give you about 5 basis points for the next couple of quarters?
I think that is fair. It starts to come down a basis point a quarter — stable to down a basis point — but it is in the range of 5 basis points.
Okay. All my other questions have been asked and answered. Thank you, guys.
Again, if you have a question, please press star and then 1. The next question will come from Matthew Breese with Stephens Inc. Please go ahead.
Hey, good morning.
Good morning.
Katie, curious what the spot cost of deposits and spot NIM were at the end of the quarter? And how do you feel about your ability to maintain or further lower deposit cost from here — is that realistic?
We were right around the 4.20% range for the spot deposit cost at the end of June. There is some nuance month to month, but I think there remains room to reprice some of our CDs downward as we proceed through the year. We are not done yet on deposit cost — I do not think so.
Tyler, you mentioned some dynamics within commercial real estate. Do you think that portfolio has been down for three quarters in a row? Do you think we can start to see commercial real estate balance stabilization by the end of the year, and when might you show some growth there?
I do not mind the mix shift towards commercial and industrial. We have been selective in commercial real estate and have reduced risk-based capital exposure there to a strategic level. The pipeline is strong. Part of what is driving payoff pressures is earlier sales of properties, which shows demand, and permanent market refinancing opportunities. Looking at our pipeline, I do think we can stabilize and potentially increase CRE balances into 2027. I am comfortable with where we are and the mix shift, which gives us the ability to be competitive and selective on pricing.
Last one: given the balance sheet size dynamics, I imagine you remain engaged in additional M&A conversations. Can you comment on how those conversations are going and whether you see opportunity in the near to medium term?
Absolutely. We remain ready, willing, and able to do additional deals and feel comfortable should something strategically compelling arise. We are engaged in many discussions and believe counterparties are interested in the upside of joining together. We continue to exercise strategic patience while focusing on executing in the core. We remain optimistic and ready to act if an opportunity materializes.
Thanks.
Thank you so much. At this time, there are no further questions. Sir, do you have any closing remarks?
Yes. I want to thank everyone for joining our call this morning. Remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.