Peoples Bancorp (PEBO) Q3 2026 earnings call transcript

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Activity levels of peoples are high as we focus on a number of strategic priorities. We are working to close the citizens merger at the end of this month. We also recently announced the pending acquisition of Capital Bancorp, which we expect to close in 2027.

We are excited about these strategic initiatives and the opportunity to enhance our capabilities, products, services, and company performance as a result of these investments. Focusing on the present, we continue to be pleased with our consistent and high-performing core results as reflected in our third quarter 2026 earnings, which we released earlier this morning. For the third quarter, we reported diluted earnings per share of $0.91.

When adjusted for one-time items, our diluted EPS for the quarter was $1.04, which exceeded consensus analyst estimates of $0.93.

Our one-time items for the quarter included a $4.5 million loss on investment securities, which reduced diluted EPS by 10 cents. This was part of our planned effort to remain below $10 billion in assets with the pending Citizens merger and acquisition-related expenses of $1.5 million, which reduced our diluted EPS by 3 cents. Some of our highlights for the third quarter include improvements in our net interest income, which was up 1%, expansion in our net interest margin of eight basis points, growth in our fee-based income of 5%, provision for credit losses declined 24%, improvement in our efficiency ratio, adjusted for one-time items, higher return on average assets, which was 1.36%, increased return on average stockholders' equity of 10.44%, declines of 11% in our non-performing loans, growth in our lower-cost interest-bearing demand deposit and money market accounts of nearly $100 million combined, and improved regulatory capital ratios.

Our provision for credit losses declined to $3.6 million, a 24% reduction compared to the second quarter. Our allowance for credit losses to total loans was 1.11%, a three basis point decrease compared to June 30th. The reduction in our provision for credit losses for the quarter was due to declines in reserves for individually analyzed loans, coupled with updates to our prepayment, curtailment, and funding rates, partially offset by higher net charge-offs.

Our annualized quarterly net charge-off rate grew to 35 basis points compared to 31 basis points for the linked quarter. For the third quarter, we had higher commercial and industrial loan charge-offs, along with increases in commercial real estate and consumer indirect loan charge-offs. At the same time, we had a reduction of 25% in our lease charge-offs. As anticipated, our small-ticket lease charge-offs have declined throughout 2026. We remain committed to our small-ticket leasing business and see a return to growth coming throughout the year in 2027 with a focus on appropriate risk-adjusted returns and minimized volatility. For the third quarter, our non-performing loans declined $4 million, or 11%, compared to the linked quarter end, which was driven by lower non-accrual loans.

Criticized loans decreased $18 million, while classified loans grew $30 million. For the third quarter, we had downgrades of two commercial real estate relationships and one commercial and industrial relationship, which drove the increase. We do not anticipate significant losses as we are in the process of exiting these credits. We expect an increase in our criticized and classified loan balances during the fourth quarter as we onboard the loan portfolio from the Citizens merger. Our delinquency levels continue to improve with 99.2% of our loan portfolio considered current at September 30th, compared to 99.1% at the linked quarter end.

Moving on to loan balances, we had increases of $19 million or 1% annualized compared to June 30th. We mentioned on our last quarterly earnings call that we had expected payoffs later in the year that would be a headwind for loan growth, and we realized some of that this quarter with commercial payoffs of over $160 million. We have also been selective with our lending activity, as we are strategically managing under the $10 billion mark through year-end.

Most of our increases in balances was in construction loans, which were up $40 million, while commercial and industrial loans and home equity lines of credit grew $34 million and $10 million, respectively. We had reductions of $38 million in our commercial real estate loans, which were due to the aforementioned payoffs, while residential real estate loans declined $14 million and leases were down $12 million.

For the fourth quarter, the Citizens merger is expected to add nearly $350 million of loans before purchase accounting adjustments. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. our net interest income grew 1%, or $1.1 million, while our net interest margin improved eight basis points. Increased investment and loan yields contributed to the higher margin, while net interest income benefited from higher loan income. Accretion income totaled $1 million compared to $1.1 million for the linked quarter, contributing four basis points and five basis points to net interest margin, respectively. For the first nine months of 2026, net interest income improved 5%, or $12.8 million. Net interest margin expanded eight basis points over the same period and was mostly attributable to our lower deposit costs. Our interest expense on deposits declined nearly $19 million compared to the first nine months of 2025. Accretion income totaled $3.4 million compared to $7.8 million for 2025, contributing five basis points and 12 basis points to net interest margin, respectively.

As it relates to our interest rate exposure. We are relatively neutral to slightly asset sensitive. We have been in this position for several quarters and the two pending mergers will not have a meaningful impact on our overall interest rate risk position.

Moving on to our fee-based income, we had growth of 5% compared to the linked quarter driven by higher lease income as well as increases in deposit and account service charges trust and investment income and bank life insurance income For the first nine months of 2026 fee income grew 8 The improvement was mostly due to increased lease income trust and investment income and deposit account service charges. Our non-interest expenses were up 2% compared to the linked quarter. This included $1.5 million of acquisition-related expenses, which were largely professional fees. Excluding these expenses, non-interest expenses were flat compared to the second quarter.

For the first nine months of 2026, non-interest expenses were up 4%. This included $1.9 million of acquisition-related expenses, which was the primary driver of our higher professional fees. Salaries and employee benefits also contributed to the growth, along with operating lease expense, which corresponds to our fee-based lease income. Our reported efficiency ratio was 58.5% for the third quarter, an increase compared to 58.3% for the linked quarter. Excluding acquisition-related expenses, our adjusted efficiency ratio was 57.3% for the third quarter compared to 57.9% for the second quarter. For the first nine months of 2026, our reported efficiency ratio was 58.5% compared to 59% for the prior year and was driven by higher revenue. Excluding acquisition-related expenses, our adjusted efficiency ratio was 57.9% for 2026 compared to 59% for 2025.

Looking at our balance sheet, our investment portfolio as a percent of total assets declined to 18.3% at quarter end compared to 19.1% at June 30th.

We completed another sale of securities as part of our investment portfolio restructuring related to the Citizens merger, which resulted in a $4.5 million loss for the quarter on the sale of approximately $59 million of securities.

In addition to providing flexibility to remain under $10 billion, this will also improve the yield on our investment portfolio.

Our loan-to-deposit ratio grew at quarter end to 91.9% compared to 91.5% at the linked quarter end, mostly due to lower deposits and some loan growth for the third quarter.

Our core deposit balances, which excludes brokered CDs, were up $19 million compared to June 30th. We had significant increases in our interest-bearing demand and money market accounts, which were up $52 million and $46 million, respectively. These increases were partially offset by reductions of $44 million in retail CDs and $34 million in non-interest-bearing accounts. Our demand deposits as a percent of total deposits was flat at 36% for both September 30th and June 30th. Our non-interest-bearing deposits to total deposits ratio was unchanged at 21% at quarter end and at June 30th. The citizens merger is projected to add approximately $550 million of deposits for the fourth quarter of 2026. As far as our capital levels, all of our regulatory capital ratios improved compared to the linked quarter end as earnings outpaced dividends.

Our tangible equity to tangible asset ratio declined this quarter and was negatively impacted by increased unrealized losses on our available for sale investment portfolio. I will now turn the call back over to Tyler for his closing comments.

Thank you, Katie. We are focusing on successfully closing the Citizens merger this month, while also prioritizing our work on the pending capital merger. These mergers will set the stage for our future strategic growth, including expanded market areas within our footprint, improved financial metrics such as higher net interest margin and lower efficiency ratio, and the ability for our associates to have more meaningful conversations with existing and new clients about the diversified products and services we provide. For the fourth quarter and full year of 2026, we have the following performance expectations, excluding the impact of non-core expenses, but including our citizens merger. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4.2 and 4.3% for the full year of 2026.

We believe our quarterly fee-based income will range between $28 million and $30 million. We expect quarterly total non-interest expense to be between $78 million and $80 million. We believe loan growth will be between 6% to 8% for 2026 compared to 2025, which includes the acquired loans from citizens. We continue to anticipate a 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 forecasts.

We expect between $11 million and $13 million of acquisition-related expenses during the fourth quarter for the Citizens' merger. We would also like to provide some high-level expectations for 2027, excluding the impact of non-core expenses and the planned capital merger. We expect to achieve positive operating leverage for 2027 compared to 2026. For the full year of 2027, we anticipate our net interest margin will be between 4.3 and 4.5%. This This assumes a 25 basis point increase in rates from the Federal Reserve in late 2026, one in March 2027, and another in September of 2027. We believe our quarterly fee-based income will range between $31 and $33 million. Our first quarter fee-based income is typically elevated as it includes annual performance-based insurance commissions.

expect quarterly total non-interest expense to be between $80 million and $82 million for the second, third, and fourth quarters of 2027, with the first quarter of 2027 being higher due to the annual expenses we typically recognize during the first quarter of each year. We believe our loan growth will be between 3 and 5 percent compared to 2026, which is dependent on the timing of pay downs on our portfolio. We anticipate similar charge-offs and net charge-off rate for 2027 compared to 2026, which includes projected increases related to the addition of the citizen's portfolio. We look to have a strong close to our 2026 performance and continue to be optimistic about our strategic plans and ability to execute on the pending mergers and future growth.

Laying out a path beyond the $10 billion threshold is the culmination of years of strategic planning and patience. The investments we have made in people, technology, and infrastructure are in place today and operating as if we have already crossed that milestone. We have proven our ability to provide reliable results for our shareholders and improve performance both organically and through acquisitions. We will continue to place importance on the value we provide as an investment to our shareholders and the return that we produce. We will focus on being a top-notch employer and sharing our culture with our new associates from our mergers.

We will make meaningful investments in the communities we serve and provide high-quality trust and solutions for all of our clients. 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 health facilitator.

Yeah, our expectation is sometime very end of first quarter or beginning of second quarter.

Yeah so it happened in August and the yield on the amount we sold was about 1 And the impact to margin on a go forward I think was the third part of your question I think we expect a slight increase of a few basis points.

No, that's still the number. And again, as a reminder that we noted in the capital announcement that they have minimal impact to our Durban and to interchange income. So, the number has not really changed.

Thank you.

Good morning.

Thanks for the question. My hope is, yes, we will see some of that easing. Let me lay out a few thoughts for you as to demand. This was actually our third highest quarter ever of commercial production, and I really like the kind of mixed shift into CNI that we've seen throughout the year. And so demand remains really positive. For reference, we expected this year about $480 million in payoffs. And through three quarters, we've seen about $460 million in payoffs. The vast majority of that, about 40 percent, is via sales of primarily of multifamily projects, which says that there's a high demand for the high-quality stuff that our folks are producing. And for the remainder of the year, there's probably about $150 to $180 million of expected, forecasted payoffs.

And whether that materializes in the fourth quarter or materializes kind of or pushes into the first quarter is, you know, one of the main questions weighing on that loan growth for the forward guidance. So did I miss anything in your question there?

Yeah, non-interest or non-maturity beta is inclusive of. Non-interest bearing is about 30%.

No, not so far. Thankfully, commercial credit remains very strong. Last quarter, we were talking about the slight increase in credit size. That's come down. Now we see the slight increase in classified. As we guided, we expect those to pay off and exit the bank. with minimal losses. So the core commercial credit remains incredibly strong. The significant reduction in the small ticket leasing is also extremely positive. I would say the one area where we've seen a slight increase in delinquency on the indirect portfolio is I think there's some pressure on consumers in that area, which is also weighing on the production with interest rates and fuel prices increasing. So that is an area where we're watching, but we continue to, you know, generate, you know, that production at, you know, near 750 credit scores consistent with our past practices.

So very cautiously optimistic on credit overall and particularly in the commercial space.

Thanks. I would say as to capital, one of the most exciting things to me is the level of mutual engagement that we have with the capital team and the capital leadership particularly. And a big part of that is obviously the continuity for their bankers and their clients and their entire organization of our intent to continue the things that they're doing that made them attractive purchase in the first place. So I don't anticipate any kind of trough because the lead-in of the next four, five, six months of engagement together, that includes our bankers, our credit staff, their leadership, their bankers, and their clients is mutually committed to continuing what it is they do. So we do expect that their historically higher growth rates than ours are something that we can perpetuate and is part of what makes the deal appealing.

It is. It's baked in as part of our forecast, and we do believe it will grow. Now it's not going to grow at double digits, and the growth I think will be more heavily weighted to the second half of the year, growing off of the now $100 million portfolio. But we have the right sales team, we have the right leadership, and we have the right credit box now that we've tested out to ensure that we grow in a positive way that we think can really impact and let it start punching above its weight again, which is the reason why we are excited about the future of that business.

Yeah, I mean, I think to your point, I think the last couple quarters have been pretty nice from a provision perspective. I expect we get elevated from here. I think the coverage ratio, which is how I call it, the allowance to total loans, right now we're at 1.11%. I think we get, you know, stay in that range, go up to maybe 1.2% over time with capital coming on board.

So that's where I would see us progress. Again, citizens won't have any material impact to that ratio, but capital, when it comes on board, will help stabilize that.

No problem. Thanks.

Hey, no problem, Brendan.

Well, as we articulated with the citizen acquisition closing here later this month, we will sell a majority of their portfolio at close or very near to close. As it relates to any more of our portfolio that we will sell, that will just be dependent on how we transition through the remainder of the year and where we are from an asset size. You know, we might take another $2 million to $3 million loss in the fourth quarter, but we'll just continue to evaluate the market and evaluate our asset size as we proceed through the remainder of the fourth quarter.

There's a lot of moving pieces with kind of movement in both your and citizen security books and then their impact on both the core margin and you know fair value market creation Yeah so I think in the next quarter we could see you know I going to project somewhere in an 8 to 10 percent basis point lift with the addition of citizens, again, given the securities restructure we just talked about, their portfolio, and then just the deposit franchise that it makes that organization very attractive.

Yeah, I think that number, I mean, it ebbs and flows with each rate increase. It varies a little bit, but I think that 25 basis points now, I think we would quantify be about five basis points of benefit to us.

And so I think it's, I mean, we could debate whether that's significantly asset sets today or slightly, but that's where the new number is.

Thanks, Brandon.

Morning, Matt.

Yeah, I think overall commercial growth is about 5% or so as one of the main drivers. The leasing overall growth is probably about 6% to 7%. The kind of drag on the loan growth is going to be kind of coming from our expectations on the consumer book. In a rising rate environment, we're not seeing the refi business on the residential.

Indirect has slowed down a bit, and so that's kind of the outlook on those pieces. I will say the growth as well in commercial is probably a little bit more weighted to the CNI as opposed to the CRE, but still good CRE growth.

You do.

It is a bit of running on a treadmill, as I noted, because of the heavily weighting to the sales and the payoffs in that space particularly.

Well, I think with it not being in, capital not closing until probably, let's say early in the second quarter or end of the first quarter, we won't have the benefit of that in the first quarter. So the full-year guide with that, with capital in next year, I don't think we would get to the 5%. Once they are in our numbers on a quarterly basis, I think we will approach 5%, be at 5% or slightly around the 5% rate that we previously quoted. So for the full year, I don't think we will get to 5% in 2027.

Correct. Correct.

Yes, I think you will see our cash position decrease over time. I think some of that is just on balance sheet liquidity as we approach the end of the quarter, given the securities portfolio was smaller. I think you'll see it diminish, especially as we kind of manage through year-end.

Thank you.

Sure.

Morning.

The exit margin on the quarter was a little higher than where we reported for the full quarter. And accretion was a similar impact for the month of September as it was for the quarter. So I think we had a slight benefit, call it five to eight basis points, as we exited from where we reported for the full quarter. As it relates to deposits, I think, you know, we're starting to see some more competition in the market for deposits, and I think we'll continue to see that as this rate outlook plays out and as we start to see rates potentially move upward. And so we've been slowly following that trend and we'll continue to actively manage it as we have been in the past.

And that will continue to likely come through our retail CD pricing product.

So the full cost saves for capital will not be realized in 2027. They won't be fully realized until 2028.

Thank you.

A couple things. I think Q3 was a little lighter than we anticipated. that I think some of that was just the timing that we'll see move into the fourth quarter. And that, again, therefore, starting at the 73, I think you're starting off a little light, a million, call it, for a round number. I think then you have the annual increase in predominantly our largest expense item as it relates to salaries and benefits. And I think we are seeing a meaningful increase in benefit cost expectations for 27 over 26. I'd say those are the big factors that are probably influencing that number higher than where you just quoted, Brendan.

That's helpful, Collar. Thank you.

Yeah, I think you had it. I think it's lease income. As we've quoted over time, that's a little bit of a volatile, that creates volatility in the fee income when it relates to lease income, as we can have some end of term transactions that result in some gains that are reflected in that number on a quarterly basis. And I think you see that to the tune of a million, million and a half in the third quarter.

So I think that run rate was a little elevated versus the trend in Q3. And that's the biggest experience, I would say.

Thanks, Katie.

Yes, I want to thank everyone for joining our call this morning. Please remember that our earnings release in a webcast of this call, including our earnings conference call presentation will be archived at peoplesbankcorp. com under the Investor Relations section. Thank you for your time and have a great day.